Fed says shortages of materials, hiring problems holding back recovery
WASHINGTON, July 9 (Reuters) - Shortages of materials and “difficulties in hiring” are holding back the U.S. economic recovery from the coronavirus pandemic and have driven a “transitory” bout of inflation, the Federal Reserve said on Friday.
“Progress on vaccinations has led to a reopening of the economy and strong economic growth,” the U.S. central bank said in its semiannual report to Congress on the state of the economy. However, “shortages of material inputs and difficulties in hiring have held down activity in a number of industries.”
The report will be the subject of hearings in Congress next week, including testimony from Fed Chair Jerome Powell about the outlook for the economy, inflation, and the transition of monetary policy as the impact of the pandemic recedes.
The report released by the Fed on Friday is largely backward-looking, but it documents the central bank’s view that the recovery remains on track as firms and families navigate a complicated economic reopening.
Prices have risen faster than expected, for example, and while the supply bottlenecks and other factors driving the price hikes are expected to ease over time, “upside risks to the inflation outlook in the near term have increased,” the Fed said.
Hiring has also slowed for an unexpected reason: Companies want to bring on more employees, but not enough workers are ready to take those jobs as they cope with ongoing health and family concerns and can rely on continued federal unemployment benefits to help pay the bills.
“Many of these factors should have a diminishing effect on participation in the coming months,” the Fed said, though the speed and strength of that labor market recovery also remains uncertain.
The central bank, however, said available data suggest “a further robust increase in demand” occurred from April through June.
“Against a backdrop of elevated household savings, accommodative financial conditions, ongoing fiscal support, and the reopening of the economy, the strength in household spending has persisted,” while the financial system remains “resilient,” the Fed said.
Reporting by Howard Schneider Editing by Paul Simao
Our Standards: The Thomson Reuters Trust Principles.
Wells Fargo Sees ‘Intensified’ U.S. Economic Recovery
Key Takeaways Wells Fargo sees robust U.S.-led global economic growth in 2021 and 2022.
U.S. leadership in COVID-19 vaccinations is a key factor.
Inflation should remain manageable in 2021 and 2022.
Corporate profits and stock prices may soar to record levels.
The Wells Fargo Investment Institute (WFII), in its 2021 midyear outlook report, sees “intensified 2021-2022 U.S. economic recovery thanks to COVID-19 vaccines, expectations for accelerated spending of last year’s accumulated private savings, historically low interest rates, and the prospect of multiple government support programs.” While noting that rising inflation rates, tax rates, and interest rates represent matters of concern, the report believes that these issues are unlikely to impede the recovery.
“There is a powerful macro mosaic at work with a steadily weakening U.S. dollar, rising commodity prices, strong global equity returns, low interest rates, a robust fiscal stimulus push, and falling equity and bond volatility,” according to Darrell Cronk, president of the WFII and chief investment officer (CIO) of Wells Fargo Wealth & Investment Management.
Outlook For 2021: Biggest Global Growth in 48 Years
The report projects that strong growth in the U.S. will lead the biggest global economic expansion in 48 years during 2021, while growth in 2022 will be at a pace that is still strong but more sustainable. Specifically, the WFII forecasts that U.S. real GDP will grow by 7.0% in 2021, leading a worldwide economic expansion of 6.2%, for the biggest increase since 1973.
The key driver of the global expansion will be the rate at which COVID-19 vaccinations proceed worldwide. The traditional role of the U.S. as “the global economy’s main growth locomotive” is being enhanced by its current position as the world leader in “vaccine deployment.“
The report also expects other key drivers of global growth to include: increased global consumer spending; the reopening of Europe and Japan; the expansion of world trade; and “leading-edge strength in manufacturing” in China.
Forecast For 2022: Continued Strong Growth
In 2022, the report forecasts continued strong growth in the U.S., with real GDP expanding by 5.3%. Fiscal stimulus, pent-up demand, and excess savings are all expected to diminish as drivers of growth in 2022. However, the WFII projects that growth will be fueled by a continued housing recovery and increases in wages and employment. They estimate that global real GDP will increase by 5.0% in 2022.
Record Profits and Equity Prices Ahead
The upshot of the robust recovery, per the authors, is likely to be record corporate profits in 2021 and 2022. Additionally, they project that the S&P 500 Index will soar to new record highs, closing 2021 in a range between 4,400 and 4,600 while the close for 2022 will be between 4,800 and 5,000. The S&P 500 closed at a value of 4,241.84 on June 23, 2021, meaning that these targets would represent gains of, respectively, 3.7%, 8.4%, 13.2%, and 17.9%.
The authors anticipate that, as the U.S. economy reopens over the next 18 months, corporate sales will expand sharply. Despite rising input costs and the prospect of higher corporate taxes, the report notes that companies made substantial progress cutting costs and increasing their operating leverage during the 2020 recession. Moreover, they also see these additional positives for profit growth and equity prices: increased labor productivity; a firming of corporate pricing power; supportive monetary policy; and public and private spending.
The table below presents the WFII’s forecasts of earnings per share (EPS) for several widely-followed market indices.
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