IHS Markit U.S. Forecast Update August 2022

IHS Markit has released their August 2022 forecast update for the U.S. The current forecast is based on the following assumptions:

• A transition from pandemic to endemic continues, as infections, hospitalizations, and deaths subside.
• The forecast includes all of the pandemic relief enacted to date, the Infrastructure Investment and Jobs Act, the recent Consolidated Appropriation Act of 2022, and current tax policy. It does not include the Inflation Reduction Act. Initial analysis suggests that inclusion of the IRA will have modest impacts on growth, inflation, and the federal budget deficit.
• The Fed is now assumed to raise its policy rate to a range of 3.5% - 3.75% by December 2022, an increase of 25 basis points from the July forecast. That temporarily overshoots the terminal range of 2.5%-2.75%. The Fed’s balance sheet declines by about one third through 2024.
• Tariffs and trade agreements between the U.S. and China since 2017 are assumed to continue.
• Real foreign GDP contracted by 4.7% in 2020. Growth rebounded to 5.6% in 2021 and then slows to 3.0% in 2022, amidst the fallout from the Russian invasion of Ukraine.
• The price of Brent crude oil rose to $113 per barrel in the second quarter of 2022, up from $80 per barrel in the fourth quarter of 2021. The price is forecast to descend gradually back to $88 per barrel in 2025 due to demand destruction (caused by higher prices), a partial resolution of the conflict in Ukraine, and increased non-Russian production.

The baseline forecast (summarized here) is assigned a 50% probability. The pessimistic scenario is assigned 45% and the optimistic scenario is assigned the remaining 5%. These probabilities are unchanged from July.

U.S. real GDP declined in the second quarter of 2022, following a drop in the first quarter. Two consecutive quarterly declines in real GDP is thought by some to indicate a recession. As defined by the National Bureau of Economic Research (NBER), a recession requires a sustained, substantial decline in the level of economic activity to be present across a wide range of indicators including but not limited to real GDP. We are not there yet, based on available data.

IHS Markit has revised real GDP growth in 2022 up from 1.4% in the July forecast to 1.5% currently, because the second quarter result was stronger than expected. Growth for the second half of 2022 was revised down, which means that the economy enters the new year at a lower level. Thus, growth in 2023 was downgraded from 1.3% to 1.0%.

The forecast calls for inflation to spike in 2022 to 8.2%, up from 7.8% in the July forecast. Inflation decelerates rapidly to 4.1% in 2023, as commodity and oil prices fall, supply-chain issues ease, and the unemployment rate rises. Even so, the inflation forecast for 2023 was raised significantly from 3.3% in July.

Nonfarm payroll jobs nationally dropped by 5.8% in 2020 but rebounded in 2021 with growth of 2.8%. The forecast calls for jobs to rise by 4.0% in 2022 and 1.1% in 2023.

The unemployment rate peaked at 8.1% for the year in 2020 but fell to 5.4% in 2021. It is forecast to decline to 3.6% in 2022 before rebounding to 4.2% in 2023 and 4.7% in 2024 as output growth slows and immigration and labor force participation rise.

Housing starts surged in 2021 to 1.61 million units. Activity remains strong in 2022 at 1.58 million starts, before softening to 1.42 million by 2025.

Exhibit 1 summarizes the August 2022 forecast from IHS Markit. Exhibit 2 shows the July projections and Exhibit 3 shows the difference.

Exhibit 1: IHS Markit August 2022 Forecast for the U.S., Over-the-Year Percent Change or Level

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Exhibit 2: IHS Markit July 2022 Forecast for the U.S., Over-the-Year Percent Change or Level

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Exhibit 3: Differences in IHS Markit U.S. Projections: August 2022 Versus July 2022 (Percentage Point Differences, Except for Housing Starts)

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