Expectations for the U.S. Economy in 2022

Many of the challenges of the COVID-19 pandemic have persisted into 2022, including global supply chain disruptions, elevated unemployment, and labor shortages. New challenges, like widespread inflation, have also arisen as a result of this economic turmoil. As businesses and governments tackle the pandemic-related complications, the global economy is expected to continue to recover.

In 2022, business leaders are expected to make additional strides in managing pandemic challenges. Policy makers are also expected to continue combatting inflation and unemployment. For business leaders, monetary policy and labor shortages could continue to impact their bottom lines, but those forces are expected to wane as the global economic outlook becomes more positive.

Global Economic Growth

In the second quarter of 2021, GDP in the U.S. surpassed pre-pandemic levels, but the global recovery has been uneven. According to estimates from Organisation for Economic Cooperation and Development [OECD], global GDP surpassed pre-pandemic levels in 2021. However, global output remains stunted in early 2022. OECD’s estimates show that global output and employment remain 3.5% below their pre-pandemic levels, accounting for an income loss of about $4.5 trillion.

Predictions for global economic growth in 2022 vary based on the data used, but most estimates show positive growth in 2022. For example, the OECD predicts global growth of 4.5% in 2022, and the International Monetary Fund [IMF] provides a slightly more optimistic outlook – estimating global growth at 4.9% in 2022. On the other hand, the World Bank’s predictions are more conservative, with their approximation of global growth at 4.3% in 2022.

Since the slowdown in economic growth over the last two years has been mostly attributable to the COVID-19 pandemic, it is unsurprising that estimates of global growth favor developed nations with higher vaccination rates. However, in developing countries with slower vaccination rates, output losses are predicted to continue into 2022.

Unemployment Expected to Fall

Prior to the pandemic and subsequent shutdowns, unemployment in the U.S. was very low at just 3.5%. Then by April 2020, unemployment had peaked at 14.8%. Since that time, the unemployment rate has been steadily declining. As of December 2021, the unemployment rate was 3.9%.

According to forecasts by the FOMC, the unemployment rate is expected to continue on a downward trajectory. By the end of 2022, it is expected to fall to 3.5%.

Workforce Participation Predicted to Remain Depressed

Despite a falling unemployment rate, fewer people are working than prior to the pandemic. This shortage is exacerbated by continued strains on the labor market resulting from the COVID-19 pandemic. As of November, 3.1 million people were unable to work because their employer closed or lost business due to the pandemic. An additional 1.1 million people were prevented from looking for work due to the virus. These include people with medical conditions which make working during the pandemic dangerous or who are needed to provide care for a relative.

Another factor impacting the workforce and the unemployment rate is the slew of early retirements witnessed during the pandemic. Due to business closures and layoffs, many older workers lost their jobs. Some of these workers chose to retire rather than re-enter the workforce when businesses re-opened. Early retirements during the pandemic are estimated at 2.4 million.

Those who retired early or who are not actively seeking work due to the pandemic are not included in the unemployment rate, but these losses are captured in the labor force participation rate. This statistic shows the number of people who hold jobs relative to the total number of citizens. Currently, the labor force participation rate has recovered to only 1.5% below February 2020.

As vaccination rates increase and the number of COVID-19 cases decreases, some workers may re-enter the labor force. However, many of those who retired early will not come back to work. Additionally, an aging population is expected to reduce the labor force participation rate over the next several years. By 2030, the labor force participation rate is expected to decline to 60.4%, representing a 1.3% decline from 2020’s participation rate.

High Inflation Likely to Moderate

During the pandemic, business closures, backlogged ports, and an uneven spread of the virus led to severe supply chain disruptions. Along with low interest rates and much needed government stimulus, these disruptions led to a high inflation environment. In December, inflation in the U.S. reached an annual rate of 7.0%, the largest annual increase since 1982.

As global supply chain constraints ease and business resumes more normal operations in 2022, inflation is expected to slow. Fed Chair Jerome Powell confirmed that the FOMC shares this prediction when he testified before the Senate Committee on Banking, Housing, and Urban Affairs. During the testimony, Powell said, “Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate.”

At December’s FOMC meeting, members reported their projections for the U.S. economy in 2022. In these projections, committee members increased their projections for the inflation rate in 2022 from 2.2% in September’s projections to 2.6% in the most recent projections. While the projections were revised up, they remain far below 2021’s projected PCE inflation of 5.3%, demonstrating the Fed’s belief that inflation will slow this year.

Tighter Monetary Policy is Likely

In response to the 2020 recession, the Fed lowered interest rates to near zero and began purchasing large sums of Treasury and mortgage-backed securities. Low interest rates and quantitative easing were implemented to facilitate smooth market operations. As economic conditions continue to improve, the Fed is expected to continue tightening monetary policy in 2022.

The Fed began tightening policy by reducing the pace of asset purchases. In November, the FOMC announced their plan to begin tapering. Then at the December meeting, the FOMC decided to accelerate the tapering timeline. The previous tapering timeline had purchases concluding around June 2022. Now, if monthly reductions are approved at each meeting, purchases could conclude by March.

As tapering concludes this year, the Fed is expected to begin increasing interest rates to continue combatting the persistently high inflation. The scale and frequency of these projected rate hikes have continued to increase at each FOMC meeting. In September, FOMC members predicted an average Fed funds rate of 0.3% by the end of 2022. Then at December’s meeting, committee members increased their average predicted Fed funds rate to 0.9% by the end of 2022. The Fed often raises rates 0.25% at a time so this suggest that at least three separate rate hikes are possible this year.

The FOMC has not announced the timing of interest rate increases but Fed funds futures traders predict that interest rates will begin to rise early this year. As of January 4, there is a 63.2% probability that the Fed will raise rates at or prior to the March meeting and a 77.0% probability that they will raise rates at or prior to the May meeting.

What Can Businesses Expect in 2022?

The bottom line is businesses can expect global economic growth in 2022. Developed countries with high vaccination rates are expected to see higher growth rates while output in developing nations with low vaccination rates is expected to remain somewhat depressed. Although lower output from developing nations and continued supply chain disruptions could result in challenges for U.S. businesses, these factors are expected to subside as the year progresses.

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