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 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.
“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
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.
“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
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.
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.
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
“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”.
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 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.”