Latest News

Economic Preview: Sticky inflation, bigger paychecks, fading stimulus – how the U.S. economy is shaping up for 2022

Delta, high inflation, record home prices, major labor and supply shortages — 2021 was another helter-skelter year for the economy.

Americans are likely to face more big surprises in 2022. MarketWatch spoke with a handful of economists around the country about the big questions facing the U.S. as it enters a third year of the pandemic. Here’s what they had to say.

Omicron

The pandemic is still the biggest influencer of the economy by far.

“The virus is still boss. There is no guarantee that a worse variant won’t come along,” said corporate economist Robert Frick of Navy Federal Credit Union in northern Virginia. “Everyone wants to put the pandemic behind them, but it’s still the major factor.”

The good news is, the U.S. economy has largely adapted to the coronavirus and managed to keep expanding. “I do think wave upon wave, people are learning to live with this,” Federal Reserve Chairman Jerome Powell said last week.

““The virus is still boss. Everyone wants to put the pandemic behind them, but it’s still the major factor.””

— Robert Frick of Navy Federal Credit Union

The problem? No one knows what’s next. Take the omicron. It’s spreading faster than any other variant and is igniting a panic in Europe.

Omicron appears less deadly, but the U.S. will very learn soon just how much damage it can do by watching what happens in the United Kingdom, where it spread earlier and more rapidly.  

End of stimulus

The Biden White House’s ambitious $2 trillion social-spending plan called Build Back Better appears stalled and might not pass at all.

Some economists contend the end of fiscal stimulus could lead to withdrawal symptoms in 2022. “We have been living off the government for two years now,” said Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Still, most economists think the U.S. is is primed to grow a frothy 3% to 4%.

““We have been living off the government for two years now.””

— Joel Naroff of Naroff Economic Advisors

How come? Americans amassed big savings during the pandemic, for one thing. Wages are also rising as at the fastest pace in decades because of a major labor shortage, putting even more money in people’s pockets.

Businesses, for their part, are investing heavily in technology to get around the labor shortage and to boost production.

“Just re-stocking the shelves is going to contribute significantly to U.S. growth,” said Luke Tilley, chief economist at Wilmington Trust in Philadelphia. “That’s an undercovered story.”

Inflation

The biggest increase in U.S. inflation in 2021 in almost 40 years caught Wall Street DJIA, -1.37% and Washington by big surprise. The yearly rate of inflation hit 6.8% by one measure and 5% by another.

The Fed is now scrambling to get ahead of the problem and reassure investors that price pressures will subside in the next year.

Pretty much every economist thinks inflation will slow, and slow sharply, next year. But few are on board with the Fed’s forecast that the rate of inflation will ease to 2.6% in 2022.

“I do think we will see inflation pressures ease over time, but I don’t think we are heading back to the sub-2% inflation rates that we have been accustomed to,” said Jim Baird, chief investment advisor of Plante Moran Financial Advisors in Minneapolis.

“I don’t think we are heading back to the sub-2% inflation rates that we have been accustomed to.””

— Jim Baird of Plante Moran Financial Advisors

Naroff agrees. “What is the new trend? The Fed keeps saying 2%. I don’t think that’s realistic.”

Interest rates

The combination of higher inflation and the Fed moving to phase out its own massive monetary stimulus for the economy is bound to nudge interest rates higher in 2022.

The central bank appears on track in 2022 to raise a key short-term rate its kept near zero during the pandemic for the first time since 2018.

Higher borrowing costs are likely to exert a small drag on the economy. The 30-year mortgage rate, for example, could climb to 3.75% from around 3% right now. Car loans could also become more costly.

Frick thinks higher rates will kill off the frenzy of home refinancing and restrain home sales. On the flip side, savers who took a beating during the pandemic could finally make a little money on CDs and bank deposits if inflation nosedives.

“A lot of people are being crushed by low rates and high inflation,” Frick said.

Labor shortage

Six months ago, just about every forecaster expected the millions of people who lost a job or left the labor force early in the pandemic to return to work. It didn’t happen.

Now many wonder if several million workers have left the labor force for good. Lots of baby boomers retired and record stock market gains have made it easier for them to stay at home.

“A lot of people have permanently removed themselves from the labor market,” Tilley said.

““A lot of people have permanently removed themselves from the labor market.””

— Luke Tilley of Wilmington Trust

If he’s right, the labor shortage is not going way. But it’s not all a bad thing. Businesses might struggle to fill a near record number of open jobs, but workers will have more money in their pockets to spend.

Rising wages

One of the silver linings of the pandemic-induced labor shortage is that workers are reaping the bigger increase in paychecks in decades. Average hourly wages, for instance, have climbed almost 5% in the past year.

By contrast, wage gains barely grew more than 2% a year in the prior decade.

That’s not a bad thing, economists say. After all, corporate profits are at an all-time high. They can afford to pay more.

Even more important, consumer spending is the main engine of U.S. growth. It accounts for about 70% of all economic activity.

“Businesses are going to complain about it, but in the long run that is great for the economy,” Frick said. “People were getting used to a sub -2% economy. If we want to get back to 3%, we need to pay people more.”

Supply shortages

A series of bottlenecks — clogged ports, lack of warehouse space, too few truck drivers — have spawned the biggest supply shortages in decades. The gridlock is expected to fade eventually, but the problems will persist well into 2022.

The coronavirus is still a major disruptor, for one thing, and there’s too many weak links in the chain, so to speak, to iron out the problems quicky. Even the Fed can’t do much.

“You can raise interest rates to reduce demand, but you can’t raise interest rates to unload cargo ships or speed up production in Asia,” Baird said.

Many companies are plotting ways to secure more stable sources of supply. Some are even considering moving operations back to the U.S. from other countries like China. But that’s no quick fix, either.

“You can’t bring it all back to the U.S. very quickly,” Naroff said.

The unknown unknowns

Former U.S. Defense Secretary Donald Rumsfeld once quipped it was impossible to know what would happen in the future because of “unknown unknowns.”

Economists have been humbled by the past year — they were wrong a lot and missed many major developments. They will almost assuredly err again.

“Who knew about the supply-chain crisis a year ago? Nobody.” Frick said. “High inflation? Same thing.”

You may also like

Leave a reply

Your email address will not be published.

More in Latest News