What's Ahead For the U.S. Economy? Clearing skies with a chance of showers

Economists say to watch consumer confidence, inflation rates and Covid-19 infections to see how sunny the coming year will be 

The U.S. economic forecast for 2022 promises a favorable operating environment for businesses of all sizes as the nation benefits from steady growth in both goods and services. Tail winds include declining unemployment, rising wages, a booming housing sector, fat corporate profits, aggressive capital investment and relatively easy access to capital.

“We are in the midst of an early economic recovery after the body blow of Covid-19,” says Bernard Yaros Jr., assistant director and economist at Moody’s Analytics, an economic research and financial consulting company based in New York. “Though growth will decelerate in 2022 due to fading effects from business re-openings and past fiscal stimulus, the economy will remain robust.”

The numbers tell the tale. Moody’s Analytics expects real gross domestic product to grow at a healthy 4.3% rate in 2022. While that is less aggressive than the 5.8% real GDP growth rate recorded during the past 12 months, it remains decidedly sunnier than the 3.4% decline fueled by the pandemic in 2020. (GDP measures the total value of the nation’s goods and services; real GDP adjusts for inflation.) 

Headwinds, of course, are inevitable. And 2022 will have its own troubling mix: the potential for a peekaboo pandemic. Labor shortages. Crippled supply chains. Inflation. A wary consumer. Yet economists do not expect negatives to prevail. 

“While the Delta variant is continuing to do some damage, we expect this wave of the pandemic to soon subside and for any future waves to be successively less disruptive,” Yaros says. “Labor and goods shortages will ease as the domestic and global economies increasingly learn how to live in a new pandemic normal.”

Soaring profits and sales 

Businesses tend to benefit from a healthy economy, and Moody’s Analytics expects corporate profits to increase by 4% in 2022. That’s far better than in pandemic-battered 2020, when profits declined 3%.

Heftier earnings should help companies weather the coming year’s challenges. “Corporate profit margins have been running somewhat above their five-year average of 11.1%,” Yaros says. “That should provide some ability to absorb price pressures that have developed from rising commodity prices and global supply chain issues.”

A broad-based business group confirms Moody’s sunny report. “Most of our members have seen a healthy return of revenues and are doing about 90% of their pre-Covid business,” says Tom Palisin, executive director of The Manufacturers’ Association, a regional group with more than 370 member companies based in York, Pennsylvania. “Many have actually gone into hiring mode.”

With its diverse membership in food processing, defense, fabrication and machinery building, Palisin’s association is something of a proxy for U.S. industry. “Our members are optimistic and expect current levels of demand to continue well into 2022,” he says. “They’re expecting to continue to hire, as well. Our annual wage and salary survey usually projects between 400 and 500 job openings for the coming 12 months. Now, though, the number is more than 1,000. So, we’re looking at a doubling of the usual hiring activity.”

Hiring and wages still on the rise

Aggressive hiring is improving the nation’s employment level, a key driver of the consumer sentiment so vital to the country’s overall economic health. “Unemployment has been declining pretty steadily,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “Jobs are being added at a rate that prior to the pandemic would be viewed as astoundingly good.” 

Economists expect unemployment to be as low as 4.5% when 2021 figures finally are tallied, and could decline to 3.4% by the end of 2022, a level close to the “full employment” conditions of the pre-pandemic economy, according to analysts.

Tight labor markets tend to spark wage hikes, yet another driver of positive consumer sentiment. The current economy is no exception. “We have seen a significant increase in wages over the past year, as high as 20% to 25% (higher) for lower hourly entry-level employees or machine operators,” Palisin says of his group’s members. However, nationwide, average increases are running lower because of the normalization of wages in some industries. “In 2022, we’re looking at 2.6% growth in the employment cost index, compared with 2.9% for 2021 and 2.6% in 2020,” Hoyt says. Economists consider the employment cost index a strong measure of actual wage rates. 

Of course, wage rates aren’t the only component of labor cost. Toss into the mix the number of people employed, the number of positions filled and the number of hours worked and the result is what economists dub “wage and salary income.” And with all those factors on the rise, it’s clear that employers nationwide will be shelling out more for workers in the coming 12 months, though perhaps not as much as in the past year. “In 2022, we’re looking at about 4.6% growth in wage and salary income, coming off a 7% increase in 2021, which was up from the 1.3% of 2020,” Hoyt says.

That additional income for workers should encourage greater consumer spending and signs are that people also have saved up considerable sums of cash, which they are ready to spend, too. Throughout 2020 and early 2021, after-tax income rose much faster than economists had anticipated prior to the pandemic, in large part because of massive fiscal stimulus from federal and state economic impact checks and expanded unemployment insurance payments. At the same time, consumer spending ran lower than anticipated as the pandemic limited spending on travel, entertainment and a host of services. 

“People now have a huge amount of savings,” Hoyt says. “Furthermore, consumer credit card borrowing has been weak, leaving consumers more flexibility to borrow money going forward if they choose to.” 

Companies investing and building

Given healthy corporate growth, it is little wonder that business investment remains robust. Moody’s Analytics expects capital investment to increase 8.2% for both 2021 and 2022, another welcome rebound from a 5.4% decline in 2020. 

“Our members, in general, are expanding — building new warehouses and manufacturing facilities, and buying new equipment,” Palisin says. “We are seeing a special uptick in the automation category because of the labor supply issue.”

Nationwide, Yaros sees investments in other areas, as well. “Investments in information processing equipment and software are well above pre-pandemic levels as businesses have boosted their IT budgets,” he says. Higher energy prices also have fueled aggressive investments in mining exploration, shafts and wells.

The economy also should benefit from more spending on commercial buildings. “We’re going to see more nonresidential construction next year,” says Bill Conerly, an economics and business consultant in Lake Oswego, Oregon. “It will be strongest probably in warehouses and light industrial, but also suburban offices. Early indicators, like the Architectural Billings Index, are looking positive.” This will be a change over recent flat activity, which Conerly attributes to the long lead times characteristic of such construction and a lack of new projects in the early days of the pandemic. “Early in 2020, nobody was signing papers to acquire land or do new projects,” he says. “So, what we see going on now are projects that were planned pre-pandemic or those with short lead times.”

Ready money is fueling the investment and expansion boomlet. “For the most part, our companies are able to access funds for hard capital investments and lines of credit,” Palisin says. “Financing has loosened up since a year ago when everybody was in a high state of uncertainty.”

On the residential side, housing starts have been running about 15% higher than pre-pandemic levels, according to Moody’s Analytics. “Annual growth in housing starts will remain strong because of favorable demand-side factors, namely demographics and excess savings,”  Yaros says. Analysts expect housing starts to increase 11.9% in 2022 — aggressive by historical standards and slightly higher than the 10.6% growth rate expected for 2021 when final numbers are tallied.

Eager consumers and investors are bidding up the prices of single-family homes, a process fueled by low interest rates, low housing stock and some easing of mortgage lending standards. When numbers are tallied, housing prices for 2021 are expected to jump 17.5%, up considerably from the 10.4% gain in 2020. In 2022, Moody’s Analytics expects increases to decelerate to 4.6%. 

But workers are scarce 

The favorable economic forecast is not without its clouds — and potential storms. As most employers will attest, hiring initiatives are ambitions, but candidates are scarce. 

“Our members are having difficulty finding enough workers, especially for entry-level jobs,” Palisin says. “The average time to hire has doubled from what it was prior to the pandemic. This will certainly impact our members’ ability to take on new work or provide on-time delivery.”

Nationwide, job openings recently topped a record-
shattering 11 million — a significant increase to the pre-pandemic level of 7 million. “The No. 1 concern of businesses going forward will be finding qualified labor,” Yaros says. “There have never been so many open positions across every industry and government, but the need for more workers is especially acute in manufacturing, transportation, educational services, health care, and leisure and hospitality.”

The reasons for the scarcity range widely. “There has been a significant drop-off in labor force participation as folks were forced into retirement or are staying home to deal with child care or other dependent care issues that are more difficult to handle in the current environment,” Hoyt says. Some workers fear the risk of workplace infections. Others can’t find exactly the job they want. And many pandemic-shocked people are reassessing their life missions and pursuing new ventures.

A number of factors may help relieve the labor crisis in 2022. These include the end of bonus unemployment insurance, the waning effect of stimulus payments, lower Covid-19 infection rates, and a return to in-person schooling.

Will supply chains unkink?

The tight labor market is fueling another business headache: a global breakdown in the efficient distribution of goods. “Most of the time the root cause of supply chain disruption is a lack of sufficient workers,” Conerly says. When people aren’t available to do the work, efficient production and transportation fall by the wayside. Cargo ships are piling up at ports, causing delivery delays and leading to widespread price increases for supplies. 

The supply chain squeeze has hampered a broad spectrum of industries, including bedding. “Close to 95% of our members are experiencing supply chain issues,” says Megan Tanel, senior vice president of the construction sector for the Association of Equipment Manufacturers based in Milwaukee. “More than half say the issues are getting worse. There are transportation bottlenecks, and materials and component shortages. For the vast majority of our members, these issues are both domestic and global. And they are causing huge constraints on production.”

Supply chain disruptions are causing companies to look at alternative regional or local sources. “Many businesses are no longer relying on any single supplier or global region for goods and services,” says John Manzella, a consultant on global business and economic trends base in East Amherst, New York. “They are building more diversified and reliable supply chains. Instead of buying in scale from two very large Chinese suppliers, they might buy in smaller increments from a half-dozen suppliers located in different regions of the world. They may also utilize more long-term warehousing facilities. This strategy, which adds costs but reduces risk, will be extremely beneficial in protecting against the next pandemic, black swan or trade war.” Finding alternative sources, though, can be easier said than done. 

Indicators to watch

As businesses enter the early months of 2022, economists suggest watching four leading indicators for an idea of how the year will go. The first is consumer confidence. 

Given favorable wage and income trends, you might expect consumers to feel fairly good. In the closing months of 2021, though, consumers were unsettled. “It really is difficult to get a good sense of consumer confidence in the current environment,” Hoyt says. One reason, of course, is the unclear path of the pandemic. Another is the recent rise in prices for fuel and other consumer goods, sparking fears of inflation. 

“Inflation will be the key financial statistic to follow early in the year,” Yaros says. Moody’s Analytics calls for growth in the core PCE price index to moderate to 2.2% in the fourth quarter of 2022 as the effects of past fiscal stimulus fade. (The core PCE price index excludes energy and food prices.) Businesses also should watch for higher levels of persistent inflation that might cause the U.S. Federal Reserve to increase interest rates, a move Moody’s Analytics does not anticipate before 2023.

Yet another leading indicator will be employment. “More people getting back on the job would confirm a strong 2022,” Conerly says. “Are employers getting the workers they need? Are people earning more money to spend?”

Finally, a nonfinancial force may be more important than anything else — as it has been for nearly two years. 

“The damage done by the Delta variant has taught us that the pandemic is still alive and has the potential to disrupt economic activity,” Hoyt says. “Early in 2022, the leading data will be about Covid-19. What are the trends in vaccination rates? Infections? Hospitalizations? Deaths?”

Favorable answers bode well for a healthy year for the economy. •

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