Economists, once extremely optimistic about the reopening of the U.S. economy, are trimming their 2021 growth expectations as businesses struggle to keep up with consumer demand amid supply and labor shortages.
Several firms have recently cut their projections for real gross domestic product (GDP). BMO Capital last week reduced its second-quarter forecast to an annualized rate of 9.5% from 11%, and its 2021 outlook to 6.8% from 7%. ING said in an email Tuesday that it’s working to pare back its second-quarter prediction to “around 10.5%” from 13.3%, and to 6.7% from 6.9% for the year. Wells Fargo, which said in an email it’s in the process of re-evaluating its forecast, added that it suspects most economists are looking to trim their projections.
The Atlanta Federal Reserve was on the same page, dropping its real-time but unofficial estimate for GDP growth to a seasonally adjusted annual rate of 7.8% on July 2, from 8.6% on July 1. The move came after the government reported that real personal consumption expenditures growth and second-quarter real gross private domestic investment growth fell to 10.4% and 4.7%, from 11.3% and 6.1%, respectively.
The trimming of expectations is a departure from sentiment in March, when economists were mostly boosting their forecasts. At that time, they were optimistic that President Joe Biden’s larger-than-expected American Rescue Plan would put more money in people’s hands and allow consumers to kick-start the economy as vaccines made many more comfortable leaving their houses again. While that part was correct, with household savings surging by record amounts and consumers eager to spend, what economists didn’t foresee was how constrained the economy would be by supply bottlenecks and worker shortages.
The supply and worker shortages are so severe that one restaurant chain said in an Institute of Supply Management survey on Tuesday that it hasn’t even been able to open all its locations. “Our restaurants are quickly—maybe too quickly—returning to 2019 sales levels. Strong consumer demand for dining out is clearly evident as COVID-19 restrictions ease, but the challenges are supply chain outages, logistics delays and employee- and management-staffing constraints.”
Even though economists are scaling back their expectations for economic growth, they emphasized the economy is still extremely strong. BMO Senior Economist Sal Guatieri noted that even his lowered full year forecast of 6.8% growth “would still be the best year since 1984.”
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