October 13, 2021

By Harris L. Kempner, Jr., President

Due to several factors, we are reducing our projections of economic growth for the year ending 2021. We were at 8% real GDP growth for the year. We now believe that in the 3rd and 4th quarters, the growth rates will be closer to 6% real GDP and therefore, there will be about 6 ½% real GDP growth for the calendar year 2021. The reasons for this reduction in our estimate are several.

1) First and foremost is the rise of the Delta variant. It is the most significant negative impact to our previous view of business progress, particularly in the hospitality and restaurant areas. Government employment figures indicate that the hospitality and restaurant areas created -0- jobs in August versus over 300,000 on average for the previous several months. As long as we do not see a significant decline in cases and hospitalizations, this negative effect is likely to continue. We will be watching for any changes.

2) There are world-wide supply chain difficulties. In almost every industry, shipping is slow, Covid has affected countries that build computer parts, and other important parts needed in assembling the complicated modern machines we rely on. This is true in many areas including consumer goods, energy, and transport. Throughout this year, the world economy has been working against this trend, but it has not been sufficient to fully cure this deficiency. This thwarted reliance on just-in-time inventories is a second major contributor to the lowered GDP view we now have.

3) A very particular part of this supply chain concern is the chip shortage in which the computer chips and others that are essential to multiple industries are sometimes unavailable. This is due both to the fact that demand is greater than production capacity in some instances, and in others, Covid had shut down chip factories, particularly in Malaysia and the rest of southern Asia. Work arounds are gradually dealing with this, but it may be with us for a considerable amount of time.

However, despite the reduction in our estimated GDP growth, note that we are still maintaining roughly 6% growth in the next two quarters. This is well above the average GDP levels for the U.S. economy that we had experienced during the decade preceding in 2019. That was more like 2 – 2 ½%. We also believe that next year (2022) will be above 4% real GDP, which is roughly twice the average for the ten years ending in 2019. In fact, we believe that the U.S. economy has enough fundamental strength to be self-sustaining now, even with no new government spending programs such as the infrastructure bills added to the mix. There are several reasons for this relatively optimistic longer-term view.

1) Perhaps the most basic is that inventories throughout the economy are extremely low. Demand for many, many goods and services still remain relatively high, and we think it will continue to be so. The need to build inventories to meet this demand will be a solid push forward for the economy throughout the next 18 months at least.

2) Another factor is that wages and salaries are at extremely high levels overall and the savings rate is high. Please remember that consumer spending is 70% of the U.S. economy. The fact that there is a lot of liquidity in the consumers’ hands will fuel this very important piece of the economy. There is also a high amount of consumer wealth that is not counted in short-term savings. These are investments and stocks. These are at relatively high levels due to stock market growth and, for now, are another bulwark for consumer spending going forward.

3) Property and income taxes have generated higher than expected revenues for cities, states and the federal government. We expect government spending therefore, to be a bulwark of the economy even without considering any new infrastructure programs.

4) There is a demand for labor. Job openings are extremely high. The jolt figure provided by the federal government is over 10,000,000 job openings, which are by far, the highest they have ever been. It remains to be seen with Covid in the air as to how quickly these job openings will be filled, but it is another place where the economy could be much stronger going forward.

So all in, though we are reducing our very optimistic view of the economy for 2021 from 8% real GDP to 6% – 6 1/2% real GDP for the calendar year 2021, there are enough strengths in the economy now to lead us to believe that a self-energizing economy will produce substantially higher growth rates than the average in 2022. We’ll refine our 4%+ real GDP projection for 2022 as we get closer to year end.