The economy is booming. 5 reasons that could change in 2022

The hope is that this rapid expansion will continue into 2022, allowing the country to heal most of the economic wounds caused by the health crisis. The labor market could return to full employment by the end of 2022. It is expected that severe inflation will finally subside, and is heading towards better levels.

However, the past two years have shown how unexpected events can alter expectations, sometimes dramatically.

For all its recent strength, the economic recovery faces multiple risks in 2022, starting with the force that still dominates daily life: Covid.

Covid is not going away

The hope is that Omicron will spread so quickly that it will burn itself out, making its effect short-lived. But what if this latest wave continues long enough to limit consumer demand – especially in Covid-sensitive sectors such as travel and restaurants?

“The pandemic remains the single largest potential disruptive factor for the local and global economy,” said Joe Brusolas, chief economist at RSM.

The greater risk is the emergence of a more serious variant, with more severe symptoms and the risk of evading vaccines and booster shots.

Wall Street seems unfazed by these two dangers, at least as of late. Record highs in the stock market indicate that investors are not betting that Omicron or any other variable will pose a problem.

“Hopefully they’re right,” said David Kotok, chief investment officer at Cumberland Advisors. “This is a mutated disease. We now have two years of experience. What would make anyone think Omicron is the latter?”

Supply chains are still confused

Omicron arrived just as stressed supply chains – one of the biggest drivers of inflation – were beginning to show a glimmer of hope.

The delta variant earlier this year put additional pressure on supply chains by making workers sick, making them afraid to go to work and imposing new health restrictions.

It’s too early to say whether the same will now happen in the factories, ports, and trucking companies that keep the economy thriving.
Mark Zandi of Moody's plans to lower his US economic forecast after Omicron's concerns

“Omicron is likely to disrupt supply chains even more and will be a drag on growth and investment,” said Vincent Reinhart, a former Federal Reserve official who is now chief economist at BNY Mellon.

The good news is that the Omicron wave is hitting at a time when demand usually subsides, giving supply chains extra breathing space to deal with the new variable.

Inflation stays hot

Consumer prices rose in November at the fastest pace in 39 years, driving up the cost of living for households. Goldman Sachs expects inflation to pick up a bit in the coming months, before calming down considerably later in 2022.

One risk is that new bottlenecks linked to Covid are limiting supply, driving up prices. Another concern is that inflation continues to spread and is further ingrained in the psyche of consumers and business owners, which in turn may lead to a negative feedback loop that leads to higher inflation.

High energy prices have been at the heart of rising inflation, most notably prices at pumps. Another rise in oil prices, as some on Wall Street have called, should make the inflation picture bleak.

Fed policy error

After nearly two years of unprecedented support, the Fed is finally starting to take its foot off the throttle — and is preparing to hit the brakes very soon.

In an effort to combat inflation, the Fed plans to end its bond-buying stimulus program around March, and has decided to raise interest rates three times for the next year.
America does bad jobs

Given the strength of the recovery, the economy should be able to absorb those gains without negative repercussions. Borrowing costs will remain historically low.

“My sense is that the economy is in a very good shape right now. The Fed has a lot of bandwidth to work with,” said RSM’s Brusolas.

Investors tend to agree, as markets signal confidence that the Federal Reserve will skillfully emerge from emergency mode without adverse side effects.

But there is a possibility that the Fed will overdo it by raising interest rates faster than the economy or financial markets can handle. This can severely slow down or even terminate the recovery.

No more help from Uncle Sam

After providing nearly $6 trillion in Covid relief during the first two years of the pandemic, federal support for the economy is expected to slow sharply in 2022.
This has always been the case, but the trend will be more pronounced given the apparent demise of the Build Back Better Act, including the enhanced Child Tax Credit.

“We’re going to do an experiment on how much of this strong expansion is due to financial support and how much private activity,” Reinhart said. “We do not know”.

the unexpected

Any list of risks to the economy should include unexpected events that few expect but still can have a significant impact.

The best example of this is a massive cyberattack that is causing disruption, either in the real economy or in the financial markets or both.

Federal pandemic aid dries up as companies grapple with Omicron's impact
The Colonial pipeline hack earlier this year demonstrated how vulnerable critical infrastructure is to the cyber threat. A recent report from the JPMorgan International Council warned that the Internet is “the most dangerous weapon in the world politically, economically and militarily”.

Federal Reserve Chairman Jerome Powell expressed public concern earlier this month about the potential impact of cyber interference that could lead to the collapse of a major bank or a major cog in the financial system.

There are countless other wildcard dangers Beyond the internet, everything from war and natural disaster to the crash in the cryptocurrency market.

“You have to be humble,” Reinhart said. “There was no pandemic on the radar screen in 2018 and probably not in 2019.” “Is it possible in 12 months that all we’re going to talk about is something we’re not talking about right now? Yes.”


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