After a second year in a row in which the word ‘unprecedented’ has done more than its fair share of big storytelling efforts, economists view 2022 with suspicion: The uncertain severity of the omicron variant and the sharp price increase are casting shadows binoculars on forecasters’ expectations, but some still find reason to be optimistic about these unknowns.
“2022 is what I’m going to call a transition to normalcy,” said Eric Diton, president and CEO of investment advisory firm The Wealth Alliance. “This means that the global economy will continue to grow, but not at about the rates we saw in 2021. It means that inflation will still be stubborn – but as the end of 2022 approaches, I think. that we’re going to solve a lot of these supply chain and employment issues, ”he said.
Here are the top issues economists have on their radar for 2022:
The rapidly evolving omicron variant of Covid-19 turns out to be the biggest wildcard in the short term. “The first half of 2022 is likely to see another temporary slowdown in economic growth as skyrocketing omicron cases hit the discretionary services sector,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a recent report. research note.
Early indications suggested a less deadly outcome, leaving forecasters cautiously optimistic, said Liz Young, chief investment officer at SoFi. The United States is better positioned now than it was a year ago or even when the delta variant triggered an increase in the number of cases in the summer and early fall, she said. .
“The healthcare system at this point is pretty well prepared to pivot and create different forms of vaccines and different forms of therapy as new variations arise,” Young said. As a result, the periods of market volatility that accompanied each new variant and the subsequent surge became more muted, she noted. “These reactions are getting shorter and shorter,” she said.
Experts have recognized, however, that an epidemiological turn for the worse could reverse the widely held view in the markets that successive waves of Covid will continue to have less of an impact on the economy.
The housing market
According to data from the National Association of Realtors, the median price of an existing home hit just under $ 354,000 in November (the most recent month for which data is available), an annual increase of about 14%. Economists predict the prospect of higher interest rates could dampen future home price gains in 2022, as paying more to pay off a mortgage leaves homebuyers with less money to spend each month on payments .
Higher interest rates could dampen future house price hikes in 2022.
Daryl Fairweather, chief economist at online real estate platform Redfin, said in a new report that real estate activity will increase in the first half of the year as buyers and sellers scramble to strike deals before any rate hike. She predicted that 30-year mortgage rates would drop from their current level of around 3% to 3.6% by the end of next year, an increase that would translate into an additional $ 100 per month at the median . Despite the pressure on rates, Fairweather predicted that home prices would rise just 3% in 2022.
But while house prices may cool, renters will not see any relief yet. “Rents are going up by double digits,” said Jay Hatfield, founder and CEO of Infrastructure Capital Management.
If the government still calculated inflation today using the same models it used in the 1970s, the surge in rental costs that took place in 2021 would have been reflected in a real inflation rate north of 10 percent – one of the main reasons the current inflationary climate has created greater financial challenges for tenants. “This has hardly ever happened before. We’ve never had that kind of national rent inflation, ”Hatfield said.
Fairweather predicted another year of rising rents, estimating a 7% nationwide increase in 2022. “Demand for rentals will be strong for a number of reasons,” she said. “The end of forbearance will cause many homeowners to sell and rent instead. As the pandemic subsides, more people will choose to live in cities where it is more common to rent. In addition, she said, the booming job market and the ability of many knowledge economy workers to do their work remotely could also trigger rental demand if new residents wish to rent beforehand. to buy a house.
Housing supply will remain a problem, economists say. A June report commissioned by NAR found that the U.S. housing market has a supply-demand gap of 6.8 million units, and higher prices for materials and labor will make closing this gap even more difficult.
The stock market
Despite bouts of volatility, 2021 has been a year of gang-fighting for stocks, with stocks steadily setting new highs. With these gains all but in the rearview mirror, market professionals are predicting a return to sobriety next year.
“In 2022, we’re going to be looking at the fundamentals a lot more closely,” Young said.
A big open question is whether, when, and to what extent the service sector – which comprises a significant share of economic output and jobs – will be able to rebound in 2022. “If the service sector has returned… I think the the worst of the reaction is already behind us, ”she said.
“If we start to look to the future… what seems to be built into the stock market is just a massive demand for financial assets,” said John Cunnison, chief investment officer at Baker Boyer Bank.
Cunnison rejected the hypothesis that an increase in asset prices would necessarily trigger a hard landing. “It is not a dichotomous result,” he said. “You can get high prices. Profits can continue to grow steadily at current prices. “
If 2021 was marked by hope for the future, however, experts say investors will use corporate earnings as a window into the health of the American consumer and, by extension, the country’s economic growth.
“What we’re seeing is the relative performance between the consumer discretionary sector and the consumer staples sector,” said David Wagner, portfolio manager and analyst at Aptus Capital Advisors. A cut in non-core spending could mean high prices start to weigh on consumer spending, which could portend future economic pain that could spill over into other spending categories, squeezing profits and triggering a slowdown. on Wall Street.
The work market
It wouldn’t be a stretch to label 2021 as the year of the worker, and experts have said the new year will likely reflect more of the same – at least initially. “Longer term, I think we’re going to continue to see labor shortages… but over the next year it’s going to get better,” Wagner predicted.
Consulting firm Deloitte found in a recent survey of CFOs that companies expect to invest and spend in equipment, technology and human capital in 2022. “There is going to continue to be a significant increase. national hiring and wages, ”said Steve Gallucci, CFO North America program leader at Deloitte.
Early retirement has taken more than a million workers out of the labor pool.
Yet even Federal Reserve Chairman Jerome Powell admitted that policymakers were perplexed as to how depressed the labor force participation rate remained in 2021. In the New Year, experts say that the US workforce will come closer to its pre-pandemic standard, but only on the rise. until a certain point. Some of the changes triggered by Covid-19 are likely to be, if not permanent, long-term elements of the job market.
“I think labor force participation remains lower than it was before the pandemic,” Young said.
Early retirement has taken more than a million workers out of the labor pool by many estimates. “We’re just not going to replace these people,” Young said. “This is something we will just have to expect.
The issue of inflation is paramount because it affects many facets of the economic landscape: the policy of the Federal Reserve and the interest rates paid by borrowers, as well as the prices of goods and services purchased by individuals and by companies.
“I would say what we’re seeing right now with inflation is a combination of two things. It’s a perfect storm, ”said Brad McMillan, CIO for Commonwealth Financial Network. The strong demand for goods triggered by service sector closures and the supportive monetary and fiscal policy rolled out in 2020 was on a collision course with a global supply chain that had indeed had sand in its cogs.
One positive point is the high savings rate still held by many American families.
“All of a sudden the demand for things skyrocketed just like the supply of things crunched. The question in the future is: will this continue? McMillan said.
One bright spot is the high rate of accumulated savings still held by many American families. Bank data shows that these reserves are dwindling, but some experts have expressed hope that they could last long enough to act as a buffer against escalating inflationary pressures.
“I think the wild card here – and this gives Jerome Powell a little more flexibility – is that American household equity continues to increase dramatically,” Wagner said. US households will reap some $ 600 billion in savings in 2022, Shepherdson estimated.
Markets had anticipated a trio of interest rate hikes in 2022 through much of the last quarter of 2021, a reality that was reflected in the economic projections made by members of the Fed’s policymaking committee. in December. The big unanswered question is whether this will be the right amount of tightening for an economy that has been anything but predictable over the past 22 months.