2022 Economic Outlook

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After years of trying to move inflation higher (the elusive 2% inflation goal), the Fed’s ultra-easy QE policies along with plenty of help from the fiscal side (“helicopter” money, and outsized fiscal deficits) have more than accomplished the goal. Overshoot is an understatement! The financial media tells us every day that inflation is at a 40-year high with a seeming majority believing a return of the 1970s, years of ingrained high inflation levels, is at hand.

Much of the current spate of inflation is a function of supply chain bottlenecks, service sector personnel issues, “helicopter” money, and corporate greed – all of which are transitory (to use the unpopular term).

  • Congestion at the two California major ports has improved, and since they are now working 24/7, it appears that “normal” may return by the end of February.
  • U.S. ISM Manufacturing Survey shows order backlogs at an index level of 61.9 (November). While still high by historical standards, this has moved down from May’s all-time high of 70.6.
  • Taiwan, So. Korea, and Vietnam, major chip manufacturers, have all experienced the lowest delays in six months. The same was true for China prior to the latest Covid lockdowns.

It should be noted that this picture could change abruptly depending on reactions from production factors and governments to omicron or other upcoming Covid variants. For example, the recent Chinese lockdown of the city of Xi’an (13 million population) are not yet in the data.

Supply Chains: Supply chains are still somewhat strained. Toyota has announced an output reduction as some of its Japanese factories due to continued chip shortages, and Samsung and Micron have indicated there will be output cuts due to recent Chinese closures of omicron infected areas (Xi’an). While certainly of concern, most of the news from the supply side has been upbeat, but we should be cognizant that the pandemic is not over and flare ups may further constrain supply.

Service Sector Personnel Issues:  Pre-omicron, service sectors like restaurants and airlines were re-approaching 2019 levels of activity. Omicron has had an impact, with Open Table reporting falling restaurant bookings and havoc occurring with airline schedules (cancellations) over the Christmas holiday weekend. However, with a majority of schools back to students in the classroom, many working mothers have begun to return to the workforce. We saw in the November jobs data that the Labor Force Participation Rate for young females rose, and we expect December’s numbers to continue to show such gains.

Service Sector: The financial media reports the rapid wage hikes in some of the service sectors as if they are economy wide. The latest Atlanta Fed Wage Tracker pinpoints the escalating wage issues to the lower educated and unskilled (mainly younger) in the services sector which is responsible for about 20% of the workforce.

Helicopter” Money: Much of current inflation has been caused by the policies of giving out free money of both the Trump and Biden Administrations. A simple example: A worker in a widget factory makes one widget per day. If laid off, the widget isn’t produced, but the worker has no income. Both supply and demand have fallen. By the government giving away free money, the widget didn’t get produced, but the worker still had income, and demand remained. The government produced demand/supply imbalance created inflation. That has now gone away.  The last of the helicopter money went out in December in the form of “child care” tax credit payments.

Corporate Greed: There have been reports of corporations taking advantage of the “inflation narrative” and raising prices (read: “profit margins”) at a faster rate than the cost of inputs because they know customers, having been saturated by the media with the “shortage” narrative, would not object, apparently happy to have product available at all. This is a problem that is solved by “competition” in a capitalistic economy.

Thus, it appears that, while inflation may be elevated for a couple more quarters, it ultimately will prove to be “transitory” in the sense of “not permanent” or “long-lasting.” (The term “transitory” appears to have gotten a bad name because of the need for “instant gratification” now imbued in U.S. culture.)