September 3, 2021
GDP grew 6.6% in the second quarter versus a 6.3% increase in the first quarter. However, demand remained robust in Q2 and businesses had to dig deep into inventories in an effort to keep pace with demand. As a result, we expect 8.0% GDP growth in the third quarter and 10.5% growth in Q4. That will give us GDP growth for 2021 of 7.8% followed by 5.1% GDP growth in 2022.
If that path is correct GDP will get back to its pre-pandemic level in the second quarter. However, the Fed seems to be comparing it to some projected growth path that it would have presumably attained if the recession had never occurred. On that basis, GDP will completely erase the impact of the recession in Q4 of this year.
Given the GDP forecast above, we expect the unemployment rate to decline to 4.5% by the end of this year, and to 3.5% by the end of 2022.
Given the recent rapid increase in money supply growth, he core inflation rate should rise from 1.6% last year to 5.1% in 2021 and 3.7% in 2022.
The Fed has pledged to keep the funds rate at 0% through 2023. A moderate pickup in the core CPI should boost the 10-year note rate from 1.3% currently to 1.5% by the end of 2021 and 1.9% by the end of 2022.