By Jeffry Bartash
Omicron, high inflation, ongoing shortages and slower consumer spending threaten to sap the economic recovery. The U.S. faces big questions in early 2022. Here’s some potential answers.
How much damage is Omicron causing?
There’s no doubt the fast-spreading omicron coronavirus strain has dented the economy. Millions of people have called in sick, customers are hesitant to congregate indoors, and some businesses have had to scale back operations.
The damage is showing up in the early January data. The number of people who applied for unemployment benefits this month , for instance, rose more sharply than expected. And a survey of businesses in New York state sank into negative territory for the first time in a year and a half.
Yet most business leaders expect omicron, just like the prior coronavirus waves, to pass soon. They don’t think it will leave a big mark on the economy.
Nor does the Federal Reserve. The central bank is prepared to raise interest rates soon to try to squelch high inflation. It’s more worried about rising prices than the possibility of a slowing economy.
A sharp decline in coronavirus cases in the Northeast, the original epicenter of the omicron explosion, lends support to the view. Caseloads have tumbled 30% from the peak.
“It’s likely the Omicron impact was widespread and shallow,” said chief economist Chris Low of FHN Financial.
Still, expect gross domestic product growth in the first quarter to take a hit.
IHS Markit, one of the premier Wall Street (DOW:DJIA) forecasting firms, says GDP is on track to slow to less than 3% in the first quarter from 6%-plus annualized growth in the final three months of 2021.
Is inflation getting better or worse?
Many economists contend the 7% increase in inflation in 2021 — the biggest jump since 1982 — is likely to be the high-water mark. Some see the smallest increase in U.S. wholesale prices in 13 months as a harbinger.
For one thing, they expect congested supply-chain bottlenecks to unclog and ease the upward pressure on prices. Surveys of business leaders indicate the process is underway, though it’s taking place at a glacial speed.
Government fiscal stimulus, meanwhile, has faded and Democrats face dim prospects of passing any big spending bills after President Biden’s $2 trillion Build Back Better plan failed to get through Congress.
The Fed is also planning to raise interest rates as early as March and take other measures to head off inflation.
Finally evidence has emerged that consumers are balking at higher prices. Retail sales fell in December by the most in 10 months. And a survey of consumer sentiment fell to the second lowest level in a decade over worries about higher inflation.
Still, inflation is unlikely to fall quickly or rapidly. Here’s why.
Omicron has disrupted U.S. supply chains and the ability to hire. Labor is so hard to find that wages are rising at the fastest clip in decades. A global computer chip shortage that curtailed auto production also shows little sign of going away. And Chinese factories that ship lots of imports to the U.S. are facing renewed shutdowns as the nation tries to prevent another major viral outbreak.
That could spell big trouble.
“Last year, a major port in China was forced to close for weeks, setting off a global supply chain disruption that took months to recover from,” said chief economist Stephen Stanley of Amherst Pierpont Securities. “If that experience is repeated, the hopes of an unraveling of supply chain knots in 2022 may prove overly optimistic.”
Most economists expect inflation to stay above 3% in 2022 — well above the Fed’s 2% target. Some warn it could end up even higher.
Are consumers turning bashful?
Consumer spending soared in 2021 as the economy reopened and coronavirus cases briefly nosedived after the first few rounds of vaccinations.
Outlays rose 13.5% through the 12 months ended in November, the latest data available. That’s three to four times the usual annual increase.
No one expects a repeat in 2022, especially after the end of government stimulus payments to consumers. Yet most economists still think households will spend enough to keep the U.S. growing at an above-average pace of around 4%.
The case for spending?
Wages are rising rapidly. Most people feel secure in their jobs. Home values and stock portfolios have surged. And many households saved a lot of money during the pandemic. They eschewed normal expenses such as commuting costs or banked some of their government stimulus funds.
Economists estimate consumers are sitting on more than $2 trillion in excess savings.
On the flip side, high inflation could make many consumers reconsider their spending plans. Inflation is rising much faster than wages.
What’s more, higher interest rates could retard sales of homes, autos and other big-ticket items.
Households are also adding debt again in part, some say, because everything has gotten more expensive.
“The more likely story is that [consumer demand] is fading even more quickly than even we had anticipated,” U.S. economist Alex Pelle of Mizuho told clients in a note.
It’s a big deal whichever way consumers go. They drive almost three-fourths of U.S. economic activity.