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US Economics Weekly

Labour force exodus shows no sign of reversing

This week brought more news that acute labour shortages and the resulting surge in wages are rapidly feeding through into the most cyclically sensitive components of the consumer price index.

15 October 2021

US Data Response

Retail Sales (Sep.)

The 0.7% m/m rise in retail sales in September suggests goods spending held up a little better than we had anticipated, but real consumption growth still slowed sharply in the third quarter.

15 October 2021

US Economics Update

Deepening labour shortages point to lasting damage

The August Job Openings and Labor Turnover survey released yesterday added to signs that labour shortages are still getting worse at a time when many of the temporary factors that were supposedly holding back labour supply are easing. We’re getting more concerned that much of the drop in labour force participation will prove permanent, which is in turn a reason to expect the recovery in real activity and employment to disappoint over the coming years, while wage and price growth remain elevated.

13 October 2021

Key Forecasts

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

2021

2022

2023

GDP

+6.6

+2.6

+3.1

+3.2

+3.2

+3.2

(+5.6)

(+3.5)

(+2.5)

CPI Inflation

(+4.8)

(+5.1)

(+4.9)

(+4.2)

(+2.4)

(+1.2)

(+4.2)

(+2.3)

(+1.9)

Core CPI Inflation

(+3.7)

(+4.2)

(+4.4)

(+4.6)

(+3.2)

(+2.4)

(+3.4)

(+3.1)

(+2.6)

Unemp. Rate (%), Period Ave.

5.9

5.0

4.8

4.6

4.5

4.3

5.6

4.4

3.8

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.50-0.75

10y Treas. Yld., End Period (%)

1.45

1.52

1.75

1.90

2.00

2.10

1.75

2.25

2.50

S&P 500, End Period

4298

4308

4400

4450

4500

4550

4400

4600

4700

$/€, End Period

1.19

1.16

1.15

1.15

1.15

1.15

1.15

1.15

1.20

¥/$, End Period

111

111

115

115

115

115

115

115

115

Sources: Refinitiv, Capital Economics

Labour force exodus shows no sign of reversing

US Economics Weekly

17 October 2021

Our view

Worsening shortages, which we expect to persist well into 2022, and what looks to be a permanent downshift in the labour force mean we are revising our GDP forecasts down at the same time as revising inflation forecasts up. We expect the Fed will begin tapering its asset purchases in November but, with officials likely to become more concerned by weakness in the real economy, we doubt that they will start raising interest rates before 2023.

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Latest Outlook

US Economic Outlook

A whiff of stagflation

Supply shortages will ease only gradually over the next couple of years, putting sustained upward pressure on core inflation and constraining real activity. We expect core inflation to remain above 3% for the remainder of this year, with only a modest drop back next year. We anticipate that real GDP growth will be a below-consensus 6.0% in 2021 and 3.5% in 2022. (Pages 3 & 4.)

13 July 2021
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