Chart of the week

$5 trillion later, long-run GDP expectations mostly unchanged

Despite today’s optimism, long-run GDP projections remain similar to those pre-COVID. Our chart sounds a cautious note for long-term investors.

April 9, 2021 | 2 minute read

GDP projections, then and now

Source: Federal Reserve Summary of Economic Projections. Pre-COVID GDP projections as of December 2019. Longer-run projections represent each Fed participant’s assessment of GDP growth over time under appropriate monetary policy and in the absence of further shocks to the economy.

  • The U.S. economy and markets seem to be experiencing a moment right now, as sentiment is high and investors are interpreting nearly all news as good news. J.P. Morgan Chief Executive Jamie Dimon this week notably referred to U.S. economy as being in a “Goldilocks moment,” while the IMF significantly upgraded its expectation for U.S. economic growth in 2021.
  • While anticipating the full fiscal impact of the American Rescue Plan Act to jump-start growth in the coming quarters, investors also remain encouraged by the prospect of massive infrastructure spending coupled with continued easy monetary policy throughout 2021. The S&P 500 is up 9% YTD, with economically sensitive cyclical stocks handily outperforming.
  • Underneath the significant and well-founded optimism, however, longer-term conditions remain similar to pre-COVID times.
  • Comparing pre-COVID Fed projections to today, for example, we see significant upward revisions to 2021 and 2022 GDP projections.1 But longer-run growth expectations remain relatively unchanged from prior to the pandemic as the U.S. reckons with an aging population and declining labor force growth.
  • Against this backdrop, the February survey of Survey of Professional Forecasters, in which panelists’ long-run expectations for stock returns remained a modest 5%, looks prescient. Of course, projections could undershoot the reality. Yet investors would be wise to keep in mind that long-term market returns have historically been tied to economic growth, and our economy’s long-run potential should be closely watched.

  • Federal Reserve Summary of Economic Projections. Pre-COVID GDP projections as of December 2019.

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