The U.S. economy remains buffeted by four sets of forces inter-related through the global pandemic. First, government policy retains extraordinary leverage. Second, global demand is reflating. Third, global supply chains remain stressed. Fourth is the normalization of the global coronavirus pandemic.
Fiscal policy is a key factor for this economy. Advance Child Tax Credit payments began on July 15th, paying many qualifying households $250-$300 per month per child. Federally funded enhanced unemployment benefits are being curtailed in all states. The House of Representatives is expected to vote on a nearly $1 trillion infrastructure package by September 27. The House has also passed a $3.5 trillion budget plan that will allow for a significant expansion of government social programs. Specific spending bills encompassed by the budget plan remain to be passed. Federal corporate tax rates and other tax rates are expected to be increased to help pay for the increased federal spending.
Monetary policy is expected to begin to tighten by the end of this year as Federal Reserve asset purchases are gradually reduced. Social policy may be tightened marginally at the state or local level this fall depending on the severity of the COVID-D surge. Hospital capacity limits are being tested. The Federal evictions moratorium has ended. However, states and local governments may still have their own eviction bans in place.
Global demand is increasing. Ominously, China is showing signs of losing momentum after its initial reflation following the first wave of COVID. Europe showed improved momentum through the summer after travel restrictions were eased there. However, the EU is now discouraging tourism from the U.S. due to the COVID-D surge here.
Supply chain constraints are still throttling back manufacturing activity worldwide. We expect some constraints to ease through the second half of this year, but not disappear completely heading into 2022.
Improving vaccination rates and booster shots will allow the U.S. and European economies to continue to normalize through COVID-D and subsequent COVID surges. However, lower vaccination rates outside of advanced countries will remain a threat to supply chains.
We expect Q3 GDP growth to step down from the robust 6.6 percent annualized rate of Q2 to something closer to 3 percent. The Federal Reserve Bank of Atlanta’s last third quarter result for their GDPNow model was 3.7 percent and the trajectory of forecasts is heading down. A key factor in our expectation of cooling real GDP growth for Q3 are headwinds on consumer spending. Both cars and houses are up in price and supply is tight. The spread of COVID-D has been a damper for consumer confidence. Also, federally funded enhanced unemployment benefits are expiring. Finally, some households are facing financial pressure as evictions moratoria are rolled back. On the plus side, job growth and the advance payments for the Child Tax Credit will be supportive of consumer spending in the third quarter. Another key factor in Q3 GDP growth is the ongoing inventory drawdown. Supply chain constraints are preventing inventories from being a positive lever for the early-recovery economy.
Hurricane Ida caused severe personal hardship and economic damage in Louisiana and other states. However, we do not expect the storm to have a significant negative impact on macroeconomic data for the U.S. overall. In well-insured areas, hurricane damage is usually an economic stimulant regionally as cleanup and rebuilding efforts accelerate.
Dr. Robert Dye is senior vice president and chief economist for Comerica. Daniel Sanabria is a senior economist for Comerica.
