Economy, job growth set to slow but remain strong in 2022 as Great Resignation rolls on
After hunkering down at the start of the COVID-19 pandemic, Darris Johnson splurged this year after he and his wife were fully vaccinated: They shelled out about $150 for a weekly dinner at a nice restaurant and several thousand dollars on new bicycles and accessories.
What will 2022 bring?
“We certainly have to rein it in” says Johnson, 42, a biotechnology salesman who lives in the Houston area.
That will be easier to do while the omicron variant rages across the country.
“We’re starting to be a lot more cautious,” Johnson says.
If 2021 was the year of over-the-top as the economy reopened – in spending, job growth, worker shortages, inflation and, yes, supply chain bottlenecks – 2022 will be marked by a gradual return to normal, economists say.
The economy still is expected to notch historically strong growth with booming job gains, returning the U.S. to its pre-pandemic employment level. But the performance won’t be quite as robust as 2021’s and, by year-end, neither will headaches such as product shortages and soaring prices, experts say.
Mark Zandi, chief economist of Moody’s Analytics, said 2020 "was the year the pandemic hit, 2021 was the year of recovery and 2022 will be the year of getting back to normal.”
“There will be a rebalancing,” says Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
“We think we’ll still end up with pretty sturdy growth,” she adds, though likely not without a new array of stumbling blocks. “I think there will be a lot of uncertainty, volatility.”
Perhaps the biggest hurdle is omicron, which quickly has become the dominant coronavirus strain and pushed new daily cases to a record seven-day average of 265,000.
While omicron is highly infectious, top health experts say it appears to cause milder symptoms than its predecessor, delta, and should subside by mid-March. Until then, however, it will mean less travel, dining out, moviegoing and other activities by consumers as well as a worsening of labor shortages and supply snarls, Bostjancic says.
As a result, Zandi has lowered his forecast for first-quarter economic growth from about 5% annualized to 2.2%. And both he and Bostjancic have cut their growth estimate for all of 2022 to about 4% from 4.4%.
That’s down from a projected 5.5% advance in 2021 – most since 1984 – but still a healthy showing and well above the average yearly 2% gains for a decade after the Great Recession of 2007-09.
The rosy outlook comes with caveats.
Omicron could linger longer and cause more severe illness than expected. And Zandi and Bostjancic both figure President Joe Biden’s $1.75 trillion Build Back Better social spending plan will be passed by Congress in some form early in the year. But if Democrats can’t corral the support of holdout Sen. Joe Manchin, D-WV, and the legislation fails, economic growth will downshift to a still solid 3.7%, the economists say.
Beyond the wild cards of omicron and Build Back Better, the economy will get another big lift from consumers, who account for 70% of economic activity and will continue to benefit from severe worker shortages that have spawned lots of job openings and higher pay. They’ll likely spend some of that income as coronavirus eases and they return to traveling and other activities.
But the big spending burst from the reopening economy is history.
In November, households still had $2.6 trillion in extra COVID-19-related savings from federal stimulus checks and paring back early in the health crisis, Zandi says. But that’s down from a high of $2.7 trillion the prior month. Lower-income households who spend nearly all of their additional income will see their extra cash reserves run dry by midyear, Zandi says. He reckons consumer spending will grow a still solid 4.1% in 2022, down from 8.1% this year, while Bostjancic expects a drop to 3.9%.
Beth Stuever, 53, of Marshall, Michigan, has been spending more on food takeout and delivery services since divorcing her husband earlier this year and gaining sole custody of their three children.
She expects that to continue as the family moves to a new house with a swimming pool next month, a shift that will mean increased outlays for new furniture and pool upkeep.
They have put off trips to Costa Rica and Disney World, but if the pandemic eases as anticipated, “I do hope we can get back and start doing more of that,” Stuever says.
At the same time, she says she’ll be cautious. With the pandemic still galloping across the nation,
“I feel ok, not great," she said. "I worry what the economy will look like, and my investments.”
The outlook for other parts of the economy in 2022:
The solid gains in consumer spending should keep the nation’s jobs engine humming in 2022 but at a slower pace than this year.
Keep in mind the U.S. already has recovered 18.4 million, or 82%, of the 22.4 million jobs lost in spring 2020, leaving less room for outsize advances, Zandi says. He expects an average of 330,000 payroll gains a month, down from 555,000 so far this year but far above the monthly average of 167,000 in 2019.
The remaining 4 million jobs wiped out in the pandemic should be recovered by the end of 2022, Zandi says, as the 4.2% unemployment rate is projected to tumble to 3.5%, matching the half-century low touched before the pandemic began decimating the economy in March 2020.
Robert Stehlik, who owns two surf shops on the island of Oahu in Hawaii, says his hiring plans are on hold until he sees how the pandemic plays out. Sales were roughly flat this year as sturdy demand from local customers offset the hit to tourism from the delta wave.
“It’s just hard to predict,” he says. “There’s definitely a lot of uncertainty. You just have to be ready to change and adjust” by emphasizing online sales if the retail business falters.
Just before Christmas, Stehlik and all three of his employees at one of his shops, called Blue Planet Surf Gear, contracted coronavirus, forcing him to close the store during one of the busiest weeks of the year.
"It's been a little bit challenging," he says.
In 2022, worker shortages should persist but ease somewhat as the health crisis wanes and Americans sidelined by COVID-19 or child care duties resume their job hunts, Bostjancic says.
In turn, the share of adults working or looking for jobs – who together make up the workforce – is likely to rise from 61.8% to 62.6% by year-end, Bostjancic says. That will still be short of the pre-pandemic high of 63.4%, a level that will be difficult to reach after many baby boomers retired early during the pandemic.
The result: A labor market that continues to leave workers with most of the bargaining power, a dynamic that generated record job openings and quitting in 2021 as employees bolted for higher-paying positions.
Wages and salaries increased 4.6% annually in the third quarter, the most on record dating back two decades, according to the Labor Department’s Employment Cost Index. Zandi expects pay increase to slow to a still-sturdy 4% annual pace next year.
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But with inflation likely to cool, “It may even feel better” because consumer price increases will be less likely to outpace pay hikes, especially for low- and middle-income Americans.
Inflation pushes prices up
Consumer prices rose 6.8% annually in November, a 39-year high, as supply chain bottlenecks triggered product shortages that, along with employee wage increases and strong customer demand, pushed up prices for everything from food and gasoline to cars, sofas and hotel stays.
Simply put, a supply network hobbled by the pandemic wasn’t ready for consumers who were flush with cash and eager to spend it.
The higher prices have prompted some Americans to pull back.
Joyce O’Brien, 56, a dental hygienist who lives in Florida’s Gulf Coast area, says she, her husband and adult daughter have noticed the higher cost of gas, food and haircuts in recent months.
“I have become very cautious about how I spend my money,” she says, adding that her family largely has ditched dining out, shopping and attending concerts. And with rent soaring, she and her husband advised their daughter not to move out and instead save money to buy a home when prices fall.
But as the pandemic ebbs, more truck drivers, as well as warehouse and port workers, should return to work even as companies take steps to streamline deliveries. Supply snags already have started to improve – notwithstanding the omicron rash – and should largely be resolved by year’s end, Zandi and Bostjancic say.
Meanwhile, Americans who snapped up furniture, TVs and appliances during the pandemic, driving up their prices, are expected to shift their consumption to services such as traveling and dining out as more people are vaccinated and the crisis abates.
With oil and gasoline prices falling in recent weeks, Zandi believes inflation already has peaked and should gradually fall to about 3% by the end of 2022, just above the Federal Reserve’s 2% target. Bostjancic thinks price gains will intensify before peaking early next year.
Like consumer spending, business outlays are expected to soften in 2022 but remain solid. A big surge from technology purchases as millions of office employees shifted to telecommuting largely has petered out, Bostjancic says.
But companies still need to buy new factory machines and computers to meet growing consumer demand and replenish inventories depleted during the supply kinks, Bostjancic says.
Companies also are likely to continue to buy robots and other labor-saving equipment to cope with worker shortages. She expects business investment to grow 4.6%, down from 7.6% in 2021.
The housing market boomed in 2021 as Americans moved from dense cities to more spacious homes in less crowded suburban and rural areas both to accommodate remote work and cope with the hazards posed by COVID-19.
Low housing inventory means the gains are likely to continue at a slower pace in 2022. Housing starts should rise 5.7% to 1.67 million next year after a 14.4% gain in 2021, according to Lawrence Yun, chief economist of the National Association of Realtors.
He expects existing home sales to dip 1.7% after a 6.4% rise this year.
Government spending is expected to decrease and constrain growth as the economy improves and programs to aid low-income and jobless people shrink, Zandi says. Build Back Better, if it’s passed, would bolster government outlays.
The trade deficit is expected to widen as the U.S. economy recovers faster than those overseas, Zandi says. That means Americans will continue to buy more imports while U.S. exports to other countries increase more slowly.
Contributing: Karen Weintraub