We wish everyone a successful, happy and healthy 2022. As we’re nearing the 2-year mark of the COVID-19 pandemic, there are plenty of concerns, as well as positive items in the news about the outlook for the economy. Let’s discuss the issues and we’ll give you our outlook for 2022.
In this blog, we'll discuss:
- 3 Economic Constraints
- Plenty of Concerns with Inflation as a Top Issue
- Looking at the Economic Bright Side
3 Economic Constraints
Consumer demand in the economy is still strong, but it is dealing with 3 primary economic constraints.
1. COVID Omicron Surge and Plunge
The COVID-19 pandemic continues to dominate the news, even after nearly 2 years. The current Omicron variant has cases in many states surging at four times the previous peak levels of a year ago.
While the number of cases has risen dramatically in the past month, we are seeing some states, like New York, New Jersey, Massachusetts, and Connecticut with cases dropping just as fast as they went up. Some states still have cases on a steep incline, like Alabama and North Dakota, and have not reached their peak yet1.
This is the pattern seen in South Africa and the UK, which are several months ahead of the US with the Omicron variant. So, we remain optimistic that the cases in the US will fall equally quickly in the next few months.
UK COVID Cases
Source: New York Times
South America COVID Cases
Source: New York Times
US COVID Cases
Source: New York Times
While cases in the US have risen to nearly 4 times their previous high, the number of people in the hospital and the associated deaths have not risen as quickly. Experts are attributing this to the Omicron variant having milder symptoms than previous variants. As COVID cases are anticipated to drop during this year, we think other issues will begin to have a stronger impact on the economy and the stock market.
2. Supply Chain Delays
In the past few months, supply chain constraints and delays have limited the sales of some companies. The ports of Los Angeles and Long Beach have had trouble unloading ships as fast as they were arriving, resulting in many ships anchoring just offshore as they wait to be unloaded.
The mainstream media has regularly published the number of ships anchored just outside the ports, but this is not the whole story. Companies in China and the East have also been slowing down the transit time of these ships, so they do not just sit anchoring offshore. The number of days for ships to cross the Pacific and unload continues to lengthen.
Source: Flexport, www.freightwaves.com
Other supply constraints for companies include shortages of semi-conductors which impacts the production of cars, cell phones, PC's and other areas of technology. Clients who have ordered new furniture for their homes in the past year have reported very long lead times for the furniture to get delivered. We are watching to see if these shortages and supply chain issues will continue into 2022.
3. High Inflation
It is inflation that we think will be a key issue for 2022. The Bureau of Labor statistics announced that during 2021, inflation, as measured by the Consumer Price Index, rose 7.0%2. That is the highest level in decades.
12-month percentage change for All Urban Consumers (CPI-U), not seasonally adjusted, December 2020 to December 2021
Source: Bureau of Labor Statistics
Clients who considered buying a new car in 2021 reported that dealers were adding a significant markup to the MSRP and showing no willingness to negotiate. In addition, the inventory of some car models continues to be low, resulting in people waiting months to get the car they want.
If you’re thinking of buying a new car, we would recommend you consider waiting, if possible, to see if the car market cools down and inventories rise closer to normal levels, which may allow you to get a better deal on a new car in the future than you can now.
Plenty of Concerns with Inflation as a Top Issue
High levels of inflation and rising prices of goods could slow spending in 2022. It is widely expected that the Federal Reserve will raise interest rates a quarter percentage point 2-4 times in 2022, starting in March.
Another stimulus for the stock market the past two years has been the trillions of stimulus money from the Federal Government. The amount of additional stimulus money is likely to be reduced or eliminated in 2022. The Biden Administration is having trouble getting support to pass their next stimulus bill, "Build Back Better", and during President Biden’s recent press conference he said he is now looking to pass a smaller version of the bill.
Businesses continue to struggle to find employees to fill open jobs. Some workers that are close to retirement, and are tired of working during the pandemic, have chosen to go ahead and retire early. We’ve seen this directly with some of our clients deciding to retire sooner than expected so they can begin enjoying their retirement and new adventures.
Looking at the Economic Bright Side
A bright side of these past few years is that overall, people in the US have more money in savings than they did prior to the pandemic. Significant government stimulus has contributed to this, but some people have also spent less in the past two years, as they’ve had to delay their normal spending on things, such as travel and entertainment.
Many people are planning to spend money in 2022 on trips that were originally scheduled for 2020 and 2021. With consumer savings at higher levels, we think that could help keep consumer spending strong in the year ahead.
The bright side of a tight labor market is that people still in the workplace are finding lots of open jobs and great career opportunities.
So how will this all affect the stock market? We expect the 2022 stock market to be more volatile than it was last year. The US stock market is already off to a bumpy start in January, and we expect it to continue to be volatile throughout the year, but we are still cautiously optimistic to end the year with positive returns.
State of the Economy Webinar Replay
Do you think the US economy will get better in 2022? View our webinar replay where we discuss the state of the economy with Maria Giraldo, CFA, Managing Director, Macroeconomics & Investment Research, of Guggenheim Partners, as our special guest speaker.
We discuss many aspects of the Economy including:
- Inflation – While it is the highest in decades, will it continue?
- Consumer Spending – Will it stay strong through the year?
- Interest Rates – When and how much will the Federal Reserve raise interest rates?
- Residential Real Estate – After the big jump in housing prices in 2021, where do they go from here?
- Employment – Will businesses continue to struggle to fill open positions next year?
- Travel & Entertainment – Will these industries grow as the economy continues to reopen?
- And Much More ..
✅ VIEW: Webinar Replay Here NEW!
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Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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1 New York Times – Coronavirus Map and Cases Interactive Tracker
2 US Department of Labor - Bureau of Labor Statistics, News Release