A Look Ahead to 2022

2022: Inflation and the COVID-19 Omicron Variant Cloud Forecasts.

By Patrick Duffy

If there’s an apt analogy to yet another COVID-19 variant upsetting a ‘return to normal’ and economic forecasting, it would probably be when Al Pacino’s character Michael Corleone infamously said, “Just when I think I’m out, they pull me back in!” in The Godfather Part III.  

However, what’s even more likely is that we’re entering a ‘new normal’ phase of continued unpredictability regarding virus outbreaks for some years to come. Much like the ongoing travel security revisions following 9/11, life as we used to know it before the pandemic will likely be up for constant review depending on the current threat level.

“For 2022, we should expect an economy that’s running not just hotter than expected, but also a bit more expensive as challenges in the supply chain and labor markets persist, but gradually lessen.”

For the economy itself, it’s probably the surprising bout with inflation during 2021 which caught most pundits and analysts by surprise. Initially considering it nothing more than a transitory event related to supply chain back-ups and a large boost in the demand for goods versus services, the Federal Reserve decided to act only when it showed up clearly in higher sustained labor costs. That’s because when wages rise too fast absent Fed intervention, that usually leads to a feedback loop of higher costs passed onto consumers, who in turn demand even higher wages to compensate, etc.

With over 10 million jobs still left to fill in the U.S., the combination of a supply-demand labor imbalance plus the spigot of fiscal stimulus in 2021 and 2020 have led to a workers’ market for jobs. The labor participation rate, which plummeted to just over 60% in April 2020 versus 63.4% three months earlier, has since struggled to reach 62%, for the lowest pre-pandemic level since the end of 1976. 

While that’s partly due to early retirements thanks to higher asset values (especially 401(k) balances and home prices), it’s also due to “The Great Reshuffling,” which has meant the highest volatility in consumer-facing jobs in retail, leisure and hospitality. Given these factors, it’s quite possible that the domestic economy has already reached full employment, while still leaving enough room for the usual ebbs and flows between seasons, locations and companies.

For 2022, we should expect an economy that’s running not just hotter than expected, but also a bit more expensive as challenges in the supply chain and labor markets persist, but gradually lessen. In a nod to this emerging reality, the Fed has said it will roll back its purchases of treasury and mortgage securities faster than previously planned, and will boost its own Federal Funds rate three times to 0.9% by the end of 2022. 

It also updated its forecasts for 2022 accordingly, including higher GDP growth of 4.0%, the unemployment rate falling further to 3.5%, and inflation subsiding under 3.0% per year.

For the housing market in particular, this continued unpredictability should continue to provide a strong tailwind for demand in outlying suburbs, smaller cities and vacation home markets with reliable Internet connections. 

With more employers postponing their ‘return to office’ dates and even offering permanent ‘remote-first’ positions, even as more COVID-19 variants sweep the country, adaptations once considered temporary increasingly seem here to stay.

The nation’s home builders seem to agree, with the NAHB’s Housing Market Index rising to 84 in December, matching the previous year’s high of 84 set in February, while the sub-index measuring sales expectations over the next six months remained steady at 84. 

In order to prepare for this optimism, the number of housing starts by builders surged by a surprising 11.8% in November versus October to reach nearly 1.68 million per year, or the second-highest level since late 2006. Similarly, they pulled 3.6% more building permits in November versus October to 1.71 million per year, which is less than highs noted over the past year, but a significant increase from the 2010s.

If there is one great unknown for the year ahead, it’s the impact of higher borrowing costs for everything from cars to homes. Nonetheless, due to pent-up demand by consumers eager to spend and millennial buyers ready to pounce on not just their first primary residences but also vacation homes and investment properties, if the housing market does soften a bit due to rising mortgage rates, it’s still expected to be a gentle landing characterized by flattening home price growth and fewer bidding wars. 

In addition, higher loan limits by Fannie Mae and Freddie Mac for mortgages to be acquired in 2022 to $647,200 in most markets and $970,800 in certain high-cost markets should keep the market humming.

Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at pduffy@metrointel.com or at 310-666-8288.

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