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U.S. growth expectations are going through the roof

February 22, 2021

Expectations for U.S. growth in the first quarter, for the year and even for 2022 are roaring higher as economists race to price in the impact of big government spending, vaccinations and higher inflation.

Why it matters: These bullish expectations are unusual — not only are they historically high, even given the large contraction the country suffered in 2020, but also because they seem to completely disregard any fears of the weak U.S. labor market or rising prices to get in the way.


Driving the news: Bank of America chief economist Michelle Meyer was the latest to raise her GDP growth targets — to 6% for 2021 and 4.5% for 2022.

  • Meyer’s bullish prediction is even more rosy-eyed than the latest from the exceptionally exuberant Goldman Sachs, which raised its GDP expectations to 7% for this year (including expectations for 6%, 11%, 8.5% and 6% growth for each of the year’s quarters) but 2.4% GDP growth next year.
  • “The risk is that growth will be even stronger given prospects for greater stimulus,” Meyer wrote in a note to clients Friday.
  • “The impact of the House $1.9tn Covid relief bill, if enacted, will have delayed and diminishing returns. As such, while greater stimulus will drive up growth for 2021 there could be more potential upside for 2022.”

Between the lines: Meyer even argues that the U.S. output gap surplus could increase to 3.9% by the end of next year, “which would be the greatest surplus since 1973.”

How it works: Pantheon Macroeconomics chief economist Ian Shepherdson says the services sector will be the main beneficiary of the upcoming surge in spending, “But people have so much cash that spending on goods can keep rising too,” he said in a note.

  • “Scope for further increases in auto sales and purchases of housing-related items is still substantial.”

Where it stands: The New York Fed’s GDPNow tracker estimates the U.S. will see 8.3% GDP growth in the first quarter.

  • The Atlanta Fed’s GDPNow tracker forecasts 9.5% growth this quarter.

Real-time data shows continued struggle

Data: New York Fed; Chart: Axios Visuals

The bubbly outlook for 2021 does not square with the New York Fed’s reading of real-time economic data, which is once again trending lower thanks to Thursday’s initial jobless claims reading and a decrease in rail traffic, which more than offset increases in retail sales and tax withholding.

By the numbers: First-time unemployment reports totaled nearly 1.4 million for the week ending Feb. 13 — over 862,000 traditional claims and more than 516,000 Pandemic Unemployment Assistance claims (an increase of almost 175,000 from the previous week).

  • It was the 48th straight week that at least 1 million people had filed for unemployment benefits and a substantive increase from the past two weeks when the number of initial jobless claims first began rising.
  • Rail traffic also showed a 7% decrease in total carloads from its commensurate 2020 level and a decline from its weekly average, according to data from the American Association of Railroads.

One level deeper: The jobs recovery has come to a screeching halt and over the past few months an increasing number of businesses are citing reasons other than the pandemic for pullbacks in hiring and rising layoffs.

  • And an increasing number of companies, especially small businesses, are again noting the difficulty of finding workers, despite an unemployment rate that both Fed chair Jerome Powell and Treasury Secretary Janet Yellen say is at a real rate of 10% and a labor force participation rate at its lowest level since 1975.

Further, even though top economists have largely shrugged off inflation worries, U.S. gas prices have reached their highest in a year, according to data from GasBuddy, mortgage rates jumped to a three-month high last week and food prices hit a 6.5-year high last month.

  • All are expected to keep rising.

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