2022 Economic Outlook — Returning to a State of Normalcy

With the new year upon us, there is a time-honored tradition among economists. We are to pretend that a calendar plays any sort of role in the performance of the economy when, in fact, there is very little that makes the arrival of 2022 differ from the end of 2021. The challenges and opportunities that existed before still remain and there will be new challenges and opportunities as there always are. At this juncture, we can assert that the big three issues of 2021 will continue to affect the manufacturer and fabricator. There will also be two new issues likely to crop up this year.

The three familiar issues will be inflation, labor shortage, and the stressed supply chain. All three are related to the same root cause and these circumstances will not change all that quickly. The last two years have been extreme. The first was an unprecedented recession that was delivered by a set of policies that had nothing to do with an underlying economic issue and the second was an unexpected and powerful recovery that overwhelmed a system hammered by that recession. It’s anticipated that 2022 is the year where some semblance of normal emerges.

Continuing Concerns

Inflation has surged to levels not seen since the 1990s as the world has not seen any kind of inflation since the 90s. The core rate has been almost two points higher than the Fed would prefer and the “real” rate has been between 5.0% and 6.0%. This is far from catastrophic but it has forced a ripple of price hikes and this will continue into the first two quarters of 2022 (at least).

The labor shortage for manufacturers has been acute for years and shows no signs of abating. The lack of skilled workers has already forced wages up and now the unskilled worker is in short supply. Workforce participation levels are as low as they have been since the 1970s.

The third of the major 2021 issues has been the supply chain breakdown. The plain fact is the system was overwhelmed by demand. There has not been enough of anything in the transportation world — not enough containers, ships, trucks, trains, planes, or people to work in the sector. There is, however, some positive news developing on this front as the demand factors have started to fade a little and there are signs that suppliers are catching up. Production has struggled but has been making a little progress and it is now likely the supply chain will be close to normal by the second quarter of 2022.

New Year, New Challenges and Opportunities

This brings us to the two new issues and both are related to the old ones. Inflation will trigger the Federal Reserve to take action to control it. The decisions to reduce or eliminate the stimulus effort have already been made but now comes the active effort to slow the economy through higher interest rates and other adjustments. The expectation is that rates will start to come up by the second quarter by a quarter-point and that these quarter-point hikes will continue through the year. The goal seems to be getting rates between 1.0% and 1.5%. This is certainly not high but after years of rates between 0.0% and 0.25%, the impact will be felt. The silver lining is that with these higher rates the banks have more margin to work with and become more likely to lend to manufacturers.

The second new development will be a real resumption of traditional consumer behavior as the pandemic threat fades. The shift away from services towards goods by consumers will start off reversed as people return to old habits of consumption as well as how they work. It is estimated that 70% of people will return to their old office routines by the second quarter (as compared to around 40% now).