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Contracting | Featured

With the Ides of March Upon Us, What’s the Economic Situation?

by Bruce Yandle, Dean Emeritus, College of Business & Behavioral Science, Clemson University on March 13, 2021

With 2021’s first two months under our belt, a new administration in the White House, and better virus news at hand, what can we say about the economic situation, especially as it relates to the Carolinas and our region?  More specifically, what do the soothsayers predict for national GDP growth, interest rates, and inflation?  Will 2021 end up better, about the same, or worse that 2020? And what about 2022?

Let’s take the nation first.  From all indications, U.S. 2021 real GDP growth will be far better than 2020’s.  The year just closed tallied negative 3.5% growth.  It was a losing year.  For 2021, the range of forecasts I follow run as high as Wells Fargo’s 6.2% to the Congressional Budget Office’s (CBO’s) 3.7%. I note that the Wells Fargo forecast is the most recent and explicitly includes the effects of a more than $1 trillion stimulus bill, which is just now emerging in the U.S. Senate.  The forecasts for 2022 are lower—5.1% for Wells Fargo and 2.4% for the CBO.  They show the declining effects of the stimulus spending.

What about inflation?  And interest rates?  Inflation for the year is expected to hit 2.7% as 2021 closes.  The interest rate on the 30-year, fixed rate mortgage, which recently submerged at 2.0%, should be hitting better than 3.0% by the end of 2021.  Looking more closely at construction inputs, wood products seem to be skyward bound, registering a 44% year-over-year increase in January.  Steel sheet is hitting 13% growth over the same period.  But construction wages are riding along with an annual increase of 2.7%.  With building permits rising apace in the region, we should expect to see more upward pressure on wages and materials, but not enough to diminish 2021’s prospects.  As noted above, 2022 is another matter.  GDP growth is expected to be weaker, but still at a solid level. But with inflation picking up, we should be prepared for the Federal Reserve to hit the brakes in the latter part of 2022.  So get ready to fasten seat belts as 2022 gets started.

The prospects for the two Carolinas are brighter than for the nation. Growth in payroll employment in both states was less negative over the last year than was the nation’s growth.  The nation experienced a 6.0% decline; South Carolina’s loss was 3.3%.  North Carolina experienced a loss of 5.2%.  The difference between the two states is explained largely by the share of employment in Leisure & Hospitality, which was hit harder in North Carolina as was the decline in manufacturing employment. Overall, the                      2021 prospects are positive for both states, with the Palmetto State being the strongest of the two.  We see the difference in growth in January housing starts.  South Carolina showed a 26% year-over-year increase; North Carolina, an 8.5% increase.

With President Biden having been in office just six weeks, we have just an outline of what his policies may look like and how they will affect future prospects.  Based on his campaign promises and executive orders, we can be certain that the new administration will be pro-union, protective of American markets, in favor of higher taxes, more inclined to regulate, and more receptive to immigration increases. We should also expect to see a sizable increase in infrastructure spending and strong support for education. 

And now, let us hope that virus protection continues to improve—worldwide—so that the Great American Bread Machine will get back on its legs again.

Bruce Yandle is Dean Emeritus, College of Business & Behavioral Science, Clemson University. His quarterly Economic Situation Report is posted on George Mason University’s web site, https://www.mercatus.org/scholars/bruce-yandle.

Topics: Contracting, Featured
Bruce Yandle, economic outlook, Economy

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