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The recovery has ended and the expansion begun

July 23, 2021
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Monthly Review (Page 3)

Growth conditions remained strong into July even as limited supply of some materials and a lack of available workers continues to hold back the expansion in certain sectors. Job gains were robust for June, led by service businesses refilling staffs in response to the surge in demand for in-person activities. Service sector growth, which slowed for June according to ISM survey data, would likely be at record levels if not for hiring difficulties faced by many industries. Manufacturers also can’t find enough workers in the current market, reducing production along with COVID-caused supply chain disruptions — increasing the costs of key inputs. Despite these limitations, demand from consumers remains strong and is driving the expansion this year. Long-term interest rates continued to trend down, reflecting near term supply-demand issues as well as a pull back in growth and inflation expectations. Equity markets marched higher in late June and the first half of July, again reaching record levels.

Outlook (Page 4)

In the near term, supply constraints of input materials (especially microchips), available workers, and homes for sale will continue to limit growth in some areas of the economy even as consumer demand has accelerated sharply. But these conditions are expected to improve over the second half of 2021 and into next year as supply chains heal and more workers rejoin the labor force. Real GDP growth is projected to slow going forward, but to remain above trend though next year. At that point, a combination of a tight economy, likely tax increases and regulatory policy changes, and (modest) Fed tightening should slow growth to around its long-term trend of 1.5-2.0 percent. The current rapid pace of inflation should moderate over the next year as supply conditions improve and base effects end, but not all of the recent rise in prices will prove to be transitory. Longer-term interest rates should move higher over the forecast period as the expansion continues, the Fed tapers (and eventually raises short-term rates), and inflation – while lower – remains above pre-COVID trends. But short-term rates should remain low for a while, with no Fed tightening until at least 2023.

Go deeper with the full July dashboard linked below.