The recent arrival of the omicron variant of the coronavirus is not great news for the U.S. economy, not least because 70% of the economy relies on consumption, a fact demonstrated by the fact that through the courst of the pandemic, consumers cut back on in-person commerce and services before governments imposed restrictions, according to the latest report from the UCLA Anderson Forecast.
The December forecast assumes the likelihood of a winter surge in COVID-19 cases and predicts that consumers will temporarily cut back their spending on in-person services. But Anderson Forecast economists expect the impact on the economy to be relatively short term, writing that consumer spending may dip over the next quarter and then rebound quickly.
The national forecast
For the current quarter, UCLA Anderson Forecast senior economist Leo Feler, author of the national report, forecasts growth of 6.9%, which would be the highest growth rate for 2021, as the economy rebounds from the wave of cases caused by the delta variant. Feler notes that the omicron variant emerged too late to have much effect on the quarter’s average growth rate.
For the first quarter of 2022, the UCLA Anderson Forecast has now adjusted its forecast to 2.6% growth from the 4.2% predicted in September, based on the assumption that omicron might be disruptive, while acknowledging that its effects cannot be predicted. But the forecast for the second quarter of 2022 calls for stronger growth than previously predicted, as the economists expect in-person service consumption to rebound. For the third and fourth quarters of 2022, growth is forecast at 4.6% and 2.4%, respectively.
In his essay, Feler notes that the economy continues to add jobs at a rapid pace; according to revised estimates, around 1 million jobs per month were added in June and July, and between 200,000 and 530,000 per month have been added since then. Those gains brought the unemployment rate down from 5.9% in June to 4.2% in November.
But labor shortages will continue to be a major concern for many businesses next year, cautions a forecast from Indiana University’s Kelley School of Business, which expects the U.S. economy to average only 300,000 new jobs each month. That would be down from an average rate of only about 450,000 a month this year.
“This will be about two-thirds the rate during the past year, but it will be enough to put year-end employment above its pre-pandemic level,” said Bill Witte, author of the Kelley School’s U.S. forecast and an associate professor emeritus of economics. “Total employment remains 4.5 million below its pre-pandemic level. This deficit is not a result of deficient demand for labor — currently there are nearly 11 million job openings in the U.S. — it reflects a severe decline in labor force participation.
“During the shutdown, the participation rate dropped 3.2 points — a very large change. During the first four months of the restart, it recovered close to half that, but in the 14 months since it has made no further progress. The labor market situation confounds the other supply-side problems. Building new capacity requires labor, both for construction and then eventually staffing.”
UCLA’a Feler outlines two main reasons a shortage of workers persists across the U.S.: First, he writes, labor force participation is still lagging, staying around 61.7% in recent months, below the 63.4% rate before the pandemic. This translates to 3.1 million fewer workers in the labor force, including workers who retired or parents who decided to stop working to care for children, given child care constraints caused by the pandemic.
Second, fewer workers hold multiple jobs now than before the pandemic. Those workers contribute to higher labor force participation and lower unemployment rates, but they are a key factor in the large number of unfilled jobs.
Feler forecasts that the U.S. economy will add an average of approximately 200,000 to 400,000 jobs per month throughout 2022, with the potential for smaller gains in the year’s first quarter if the omicron variant forces consumers to cut back on in-person services.
Feler writes that much of the recent increase in inflation is related to higher oil prices, as demand has recovered more quickly than supply. He forecasts that supply will start catching up, meaning that oil prices will come down and act as a deflationary force against inflation in other goods and services.
In addition, prices have recently stabilized or declined for some goods and services that experienced the largest increases in inflation — used cars, for example — as the supply constraints that led to rising goods prices have begun to ease. The catch-up for prices of in-person services appears to have run its course. This doesn’t necessarily mean that prices will come down, Feler writes, but they will stop increasing at the rate they have over the past year.
Overall, the national forecast is for continued strong economic growth and labor market recovery, with a lessening of supply constraints and inflation. A more severe COVID-19 wave caused by the omicron variant could temporarily derail the forecast, but it’s still too soon to tell.