April 29, 2022

GDP growth surprisingly contracted by 1.4% in the first quarter after having surged by 6.9% in the fourth quarter. But consumer and business spending remained strong.  The reason why GDP fell in that quarter is that much of that consumer and business spending was on imported products rather than domestic ones.  Thus, supply constraints appear to have significantly weakened first quarter GDP growth.  And, in fact, with COVID spreading rapidly in China and lockdowns potentially spreading from Shanghai to Beijing, those supply constraints could be getting worse.  But the supply constraints should eventually end and when they do they will boost GDP by as much then as they slowed growth in 2021 and in the early part of 2022.    We had expected the supply constraints to diminish as the year progressed, but now with the drop in Q1 GDP growth and the developments in China, we anticipate most of the reduction in supply chain imbalances to occur in 2023 rather than 2022.  Given all this we have reduced our 2022 GDP forecast from 3.5% to 2.0%.  We expect GDP growth of 2.5% in 2023 as the reduction in supply chain imbalances to provide a tailwind to growth.

Given the GDP forecast above, we expect the unemployment rate to decline to 3.2% by the end of 2022.  The Fed considers the full employment threshold to be 4.0%.  That rate has already been achieved.

Given the recent rapid increase in money supply growth, the core CPI inflation rate rose 5.5% in 2021.  Given continuing rapid growth in the money supply, the dramatic increase in gas prices, and the surge in food prices the core CPI to climb by 6.4% this year and 5.8% in 2022.

Following the March FOMC meeting the Fed suggested that it could tighten at each of the remaining FOMC gatherings in this year.  Recent speeches by Fed officials suggest that the Fed may be aiming for a neutral funds rate of about 2.5% by yearned.  If so, it will require several 0.5% increases in the funds rate along the way.  We now expect the funds rate to reach 2.5% by the end of this year and 3.5% by the end of 2023,.  Even so its policy would still be accommodative because with the projected core CPI inflation rate for 2022 of 6.4%, the real rate would be -3.9% (2.5% – 6.4%).

Stephen Slifer


Charleston, SC