Goldman with the note.
There are now signs that the Delta wave is cresting, with a drop in the positivity rate over the last couple of weeks and a more recent decline in new hospital admissions.
We therefore expect a job market rebound in coming months and have also offset part of the Q3/Q4 GDP downgrade with stronger numbers in the first half of 2022.
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Another reason for near-term optimism on job growth is the imminent expiration of extended and expanded unemployment benefits. Admittedly, there is a vigorous debate about the impact of these benefits among economists. From a conceptual perspective, ending benefits has a positive impact on labor supply but also a negative impact on household income and thus labor demand. Moreover, the July state payroll numbers didn’t show stronger gains in red states that ended benefits early than in blue states that kept benefits going. But in practice we would expect the supply effect to outweigh the demand effect given the huge number of job vacancies, and empirically our analysis shows that unemployed workers whose benefits ended early saw a statistically significant increase in their re-employment probability; we put much more weight on this analysis than on comparisons of top-down job growth, which are likely distorted by the fact that red states have seen more Delta spread. So we expect the benefit expiration to boost job growth in coming months.
But the recent news does reinforce our view that Fed rate hikes are still far off. If tapering is announced in November and proceeds at a pace of $15bn per meeting, asset purchases will likely end on September 30, 2022. At that point, we expect GDP growth of 2% or less, in part because the reopening impulse will have ended but more importantly because fiscal policy will likely subtract 3pp+ from GDP growth, owing to payback for the enormous boost of 2020-2021. This is despite our assumption that President Biden will manage to pass a longer-term fiscal package worth around $3trn over 10 years, including $550bn for the bipartisan infrastructure package and about $2½trn for the partisan reconciliation package. If the fiscal drag pushes growth below trend in late 2022/early 2023, then rate hikes likely move into late 2023 (our baseline forecast) or even 2024.
Even if growth proves more resilient, rate hikes may be slow in coming because of below-target inflation. Although our yearend 2021 forecast has moved up further to 3¾%, we still expect core PCE inflation to fall slightly below 2% in 2022 because normalization in autos and other consumer durables should far outweigh rising rent inflation over that period, and a bigger drop is possible given the size of the overshoot in goods prices this year. To be sure, average inflation will remain above 2% for several years, depending on the averaging horizon, but the forward guidance in the FOMC statement effectively rules out hikes when spot inflation is below 2%.