2022 Economic Predictions

How we got here The best way to answer this first question is to describe what we mean by here? The whole world was anxious to get out of 2020. What we didn't know that 2021 wasn't going to turn out much better. For a few brief, shining weeks in mid-summer, we thought we had finally emerged from the shadow of pandemic into the sunshine of normalcy. It turned out to be nothing more than wishful thinking. Who knew we needed to squeeze a year's worth of fun into two weeks in July?   Despite Delta and Omicron, the U.S. economy came roaring back. 2021 saw the highest rate of economic growth (5.7%) in 37 years. During Oct. through Dec., the growth rate was an impressive 6.9%. All of this growth was fueled by the addition of 6.4 million jobs and the $1.9 trillion American Rescue Plan.   After a truly miserable 2020, holiday spending rose by 8.5% compared to the year before. As discussed in The New Yorker, the Conference Board, a non-profit business membership and research group, is predicting 2022 growth to be 3.5%. Goldman Sachs is foreseeing growth to rise to 3.8%, and Bank of America is envisaging a more robust 4%. All of these prognostications are a decrease from 2021, but still represent a very strong economy. This is even more impressive when you consider that the decade before the pandemic, the annual rate of growth never achieved 3%.

As reported by Bloomberg News, "...the unemployment rate fell to 3.9% in December, according to Labor Department data released Friday. That represented a drop of 2.8 percentage points over the course of 2021, the best annual improvement on record. Early last year, economists anticipated the unemployment rate to end 2021 at 5.5%.

Supply Chain Issues for 2022

 

It took a pandemic to reveal the weaknesses and vulnerabilities in the global supply chain. The problems were exacerbated by rapid and sudden shifts on demand (think toilet paper), as well as hoarding. Other factors that impacted shortages were also directly linked to the pandemic. When the demand for new cars disappeared in 2020 (modern cars can require 3,000 chips), electronic chip manufacturers were able to shift much of their customer base to producers of smaller electronic goods. Then, when the demand for new cars rebounded, the needed chips were largely unavailable.

 

Unfortunately, the global supply chain, being a mammoth beast, with a myriad of moving parts (ships, trucks, drivers, manufacturers, packagers, containers, and people) won't be easy to fix. As reported in Fast Company, by the end of 2021, the typical container spent 20% longer in transit, and prices on major east-west trade routes increased 80% year on year.

 

The Biden administration has attempted to address the issue by issuing an executive order calling for more resilient supply chains, facilitating domestic production, creating built-in redundancies and adequate stockpiles. The White House announced, in June, a Supply Chain Disruptions Task Force intended to address short-term supply chain issues.

 

The recent actions taken are short-term bandaids that will do little to stem the flow of shortages and disruptions. Experts agree that investments in port infrastructure are needed, including more docking capacity and storage, as well as moving all port infrastructure to a 24/7 work schedule.

 

 

 

 

As reported by The Hill, "...America needs to re-invest in onshoring our manufacturing and engaging in dual or multi-level sourcing. Companies like Intel have decided to build factories in Arizona. Adidas and Nike are building so-called smart factories here to complement their overseas facilities. Similar initiatives should be encouraged with favorable tax policies".

 

Our Economy is Booming - What Could Go Wrong?

 

Matt Egan, reporting in CNN Business, sites 5 reasons why our currently booming economy could take a hit in 2022. 

1. Covid doesn't go away. "The pandemic remains the single largest potential disruptor of the domestic and global economy," said Joe Brusuelas, chief economist at RSM.
2. Supply chains stay scrambled. The Delta variant earlier this year piled additional pressure on supply chains by getting workers sick, making them scared to go to work and introducing new health restrictions. It's too soon to say whether the same will happen nowat the factories, ports and trucking companies that keep the economy humming.
3. Inflation stays hot. Consumer prices rose in November at the fastest pace in 39 years, driving up the cost of living for families. Goldman Sachs expects inflation will heat up a bit further in the coming months, before cooling off considerably later in 2022.
4. A Fed policy mistake. "My sense is the economy is in a pretty good place right now. The Fed has a lot of bandwidth to work with," said RSM's Brusuelas. But there is a chance the Fed overdoes it by raising rates faster than the economy, or financial markets, can stomach. And that could severely slow down or even end the recovery.
5. The unexpected. The best example would be a massive cyberattack that sets off turmoil, either in the real economy or in financial markets, or both. There are countless other wildcard risks beyond cyber, everything from a war and a natural disaster to a crash in the crypto market.

 

The Outlook for 2022

As reported in IMF World Economic Outlook Update, although the economy is strong, certainly in the U.S., 2022 does now look to be a bit less robust than anticipated just a short time ago. Due to Omicron, countries have reimposed mobility restrictions. Inflation, caused in part by rising energy prices and supply chain disruptions is now expected to be more prolonged than previously thought. However, inflation is expected to gradually decrease as supply-chain issues are mitigated and monetary policy in major economics responds.   A bit of good news   As reported by Preston Caldwell in the Morning Star, the economic outlook and recovery is far from finished. They don't see inflation as a threat to economic recovery, partial because the buik of our current inflation is due to vehicles and energy. They expect these factors to resolve as supply catches up with demand and the current price spikes decrease, which will drive large deflationary pressure. They predict inflation to drop to 3% in 2022 and average 2.2% over 2022-2025.   As concluded by the Morning Star, "We think the U.S. economy was operating below its potential even prior to the pandemic (in 2019). In particular, labor force participation was still running below its long-run trend, owing to the lingering impact of the Great Recession. However, we think exceptionally tight labor markets in the next few years will give discouraged workers the opportunity to rejoin the workforce".