The U.S. Congressional Budget Office (CBO) expects economic activity to rebound "rapidly" in 2021, according to a report it published on Monday.
Gross Domestic Product (GDP) - a measure of the market value of all goods and services produced in the country during a calendar year - is expected to reach its pre-pandemic level in mid-2021. Meanwhile, the CBO expects employment to rebound to its pre-pandemic level in 2022, with the unemployment rate falling to 5.3% in 2021 and to 4% between 2024 and 2025.
The CBO said its calculations haven't factored in any new stimulus, as Congress has yet to decide on a concrete plan. This means that its current forecasts are on the conservative side.
For the next five years, the CBO sees the U.S. economy growing at a rate of 2.6%, slightly below its previously estimated long-term potential of 3%, with inflation predicted to stay below 2% until 2023 and above 2% after that (barring any more dramatic actions from the Federal Reserve to increase inflation faster).
These forecasts sound like a "Goldilocks" scenario, a situation where the economy is not too hot, not too cold, an ideal environment for Wall Street. Moderate growth can help listed companies grow their top and bottom lines, while moderate inflation can keep monetary policy on the easing side.
Easy money has been a key driver of Wall Street's big run-up during the Covid-19 pandemic, but that could change if inflation gets out of control and the Fed is compelled to reverse course.
While rising inflation should be something of concern for investors, the upside risks aren't that likely according to some. For example, Innes McFee, Chief Global Economist for Oxford Economics, said, "Inflation is set to continue creeping up over the next few months, and that will give investors cause for concern... Our analysis suggests inflation risks are skewed to the upside but perhaps not as much as you might think."
McFee said he is watching two factors that are particularly important in assessing current inflation risks: fluctuations in key economic relationships and hard-to-predict secular trends. "On the changing strength of economic relationships, the risks of a spike in inflation this year stem mainly from higher GDP growth," he said. "Upside risks are particularly high in some emerging markets vulnerable to sharp depreciation."
While it's still unclear how these factors will play out for the U.S., one thing is clear: market volatility will continue on Wall Street due to quantititative easing, inflation and the continued ballooning of the corporate debt bubble, which is now well past two thirds of the entire country's wealth and will continue to grow in this environment.
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