Softening Economy, Persistent Inflation Prompt a Revised Federal Reserve Forecast

A unique economic recovery is dIfficult to predict.

By Patrick Duffy

In many ways, with a unique pandemic sweeping the globe over the last 20 months or so, it shouldn’t be too surprising that the economic recovery would be equally unique, and thus difficult to forecast. Whether due to the rise of the Delta variant and vaccine hesitancy, workers re-thinking their career options or employers adjusting to work-from-home demands, the delayed ‘return to normal’ continues to support high demand for safe and comfortable housing.

While the Federal Reserve has continued to maintain its stance that the higher inflation we’ve been seeing lately is the result of transitory factors related to supply chain and labor shortages, its updated September forecast through 2023 suggests a softer economy, higher unemployment and rising prices through the rest of 2021 and into 2022. At the same time, however, in order to balance economic growth against these rising prices, it has also indicated an unraveling of its asset purchases likely to start by the end of 2021, with inflation-fighting interest rate hikes targeted for the middle of next year.

An early September survey among purchasing managers by IHS Markit showed softer but positive growth, with its output index for the U.S. slipping nearly a full point to 54.5, and which has continued to slide since last May. Due to the ongoing imbalance between supply and demand, more respondents are also reporting passing along higher costs to their customers.

In turn, these higher costs are fueling inflation, especially for gasoline, household furnishings, food and shelter. According to its updated September forecast, the Fed-preferred PCE Price Index will rise 4.2 percent in 2021 (up sharply from its June projection of 3.4 percent), and won’t subside to around 2.2 percent until next year. The combination of higher prices and supply bottlenecks also prompted the group to reduce its estimate of GDP growth downwards to 5.9 percent for 2021 – still a sharp jump from previous years, but a bit lower than its more robust forecast of 7.0 percent in June. However, that delayed growth also meant an increase in estimated GDP growth for 2022 of 3.8 percent, up from 3.3 percent in June.

For the labor market, while it’s possible that the ending of enhanced unemployment benefits will boost the number of job seekers, the most recent claims for unemployment benefits remain elevated above pre-pandemic levels. This is due to a variety of reasons, including ongoing challenges finding child care for working families, safety concerns for positions interacting with the public, and a mismatch of both geography and skills between employers and employees. In July, the number of job openings rose to nearly 11 million, or 2.2 million more than the official number of 8.7 unemployed persons that month. While rising pay will help to fill some of those positions, others may be replaced by technology, allowing companies to make do with fewer workers.

Consumer sentiment, which had been rising sharply into the summer months, fell sharply in August as the rise of the Delta variant became more worrisome and concerns about higher inflation persisted. While the index tracked by the University of Michigan did edge back up in September, it was still down nearly 12 percent year-on-year. Small business owners, however, were showing greater optimism in August, with the NFIB Uncertainty Index falling seven points to 69, or the lowest level since January 2016, suggesting that the decline in consumer sentiment will be short-lived as Delta cases peak and inflation gradually subsides.

For consumers frustrated with rising housing prices and low inventory, the pressure remains intense for builders to pick up the slack, which they are slowly doing as summer turns into fall. August housing starts were up 3.9 percent from July and 17.4 percent year-on-year, while building permits rose 6.0 percent from August and nearly 14 percent year-on-year.

While sales of new single-family homes did rebound 1.5 percent in August, the annual sales rate of 740,000 units was still down over 24 percent year-on-year, boosting the months of inventory to 6.1 months at current sales rates. With the inventory timeline for existing homes during August at a much lower 2.6 months, this suggests that when builders are able to offer supply at a competitive price point and within a reasonable time frame given constraints in lots, materials and labor, the demand remains strong. Given the delays in a ‘return to normal’ and a growing acceptance for remote work, home builders should be able to benefit from the rebound of the suburbs and exurbs for some time to come.

Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at or at 310-666-8288.

Author: Brian