Looking to 2022

Eakinomics: Looking to 2022 ‘Tis the season for looking back at 2021 – uh, no thanks – and looking forward to 2022. As the Omicron variant spreads, some have evinced nervousness about the economic outlook. To my eye, the economy is in very solid shape; businesses continue to expand payrolls at a rapid rate, generating steady rises in household income. This is in addition to the $2 trillion or more in “extra” savings that the household sector will carry into 2022 from the fiscal stimulus of the past two years. The good news is that real growth will be in the 4-5 percent range and the economy will reach full employment by year's end. The bad news will be continued inflation – diminishing, but with core inflation still in the range of 3.5 to 5 percent (and headline inflation even higher). Of course, there will also be risks to the downside and the upside. The most obvious of the former is if the pandemic intensifies; the coronavirus will continue to dictate the path of the economy to some extent – the president’s underwhelming, day-late-dollar-short policy Band-Aid notwithstanding – but we have seen a steadily diminishing impact of each successive surge in cases. In addition, the economy could suffer from a sharp policy error (most likely to emanate from the Fed fighting inflation) or the burden of continued regulation and higher taxes. On the upside, the world could recover more quickly than expected, providing a global boost and supply-chain relief. And in the United States, there could be more rapid growth in labor force participation, raising the growth rate while easing inflationary pressures. Finally, there are some genuine wildcards, such as the geopolitical outlook, the future of fiscal policy as the Democrats attempt to save remnants of Build Back Better, and the fallout of the administration-wide quest for hipster antitrust. The economy is in relatively solid shape, would benefit from fewer attempts to “build” – either back or better – and awaits a further diminishment of the threat of COVID-19 to fully heal.