October 12, 2021 | Economic Outlook

Economic Outlook - October 2021


  1. The economy is making a strong recovery from the pandemic. Real GDP expanded by 6.3% in Q1 and 6.7% in Q2, and the Q2 reading exceeded its pre-pandemic level. The August unemployment rate was 5.2%, higher than pre-pandemic levels, but a reading that is consistent with periods of economic expansion. Despite this strong backdrop, Consumer Confidence is ticking down, falling to 109.3 in September from 115.2 in August and 129.1 in July. We attribute this downturn in confidence to worries about the Delta variant and inflation.

  2. Inflation is running at the highest level in years. The Consumer Price Index (CPI) was up 5.4% year-over-year (y/y) in both June and July and up 5.3% y/y in August. The factors driving inflation higher include pandemic-related production disruptions, corporate underinvestment during the early stages of the pandemic, and labor shortages, which are especially acute among sailors and truck drivers in the global supply chain. Central bankers have indicated a willingness to let inflation run higher for longer before raising rates.

  3. Following the meeting of September 21st-22nd, Federal Reserve officials signaled that “substantial further progress” has been made towards their employment and price stability goals. Our view is that the Fed will begin tapering their bond purchases in November, and cease all bond purchases by July 2022. We believe the Fed will then raise interest rates in the second half of 2022 and in 2023.

  4. Several matters currently under debate in Congress could impact the economy and financial markets. First, the U.S. will default on its debt if Congress fails to raise the debt ceiling by October 18th. A default could lead to interest rate spikes and a stock market sell-off. However, past debt ceiling standoffs have always been resolved, and the U.S. has never defaulted on its debt. Second, disagreements within the Democratic Party raise the possibility that neither the $3.5 trillion social spending bill nor the $1 trillion physical infrastructure bill will be passed. If neither bill passes, the spigot of fiscal spending that has supported the economic recovery from COVID would be turned off. On the other hand, these bills are likely to be financed in part by corporate tax hikes, which would lower public company earnings.

Sources: Bloomberg LLC, FactSet, U.S. Commerce Department, Bloomberg Businessweek, IHS iSuppli

Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.

For more information, call Ed Sullivan, Vice President, at 617-557-9800, or email him at