It’s time to take stock of how the economy is performing in 2021 and consider its outlook for the year ahead.
With the omicron wave upon us, it looks like Pollyannaish is overly enthusiastic about the prospects for the economy as the New Year dawns. Omicron is significantly more contagious than previous variants of COVID-19, and although it is much less virulent, it is already doing significant economic damage. The National Hockey League suspended play and much of Broadway went dark again.
But if the performance of the economy over the past year is any guide, we shouldn’t be too pessimistic either. Although it has been hit hard by the delta wave of the virus, the economy has grown like a gangbuster in 2021. The economy will not grow as strongly in 2022, but inflation, which has taken off in recent months. , will come back to earth.
That said, the quality of the economic year will depend on the trajectory of the pandemic and how policymakers respond to it.
Overall, the economy had a very good year 2021. It created over half a million jobs on average per month during the year, and unemployment has fallen by the wayside. that it was before the pandemic. The stock market has been setting record highs all year and house prices have sizzled. Retail sales this holiday season will likely be the best ever. Yes, never.
This strong performance can be attributed, in large part, to the federal government support provided by the US bailout. This massive relief program, which was enacted last spring, has provided funds that are still being used to fight the pandemic, strengthen school systems and state and local governments, and help struggling low- and middle-income households. financial.
Growth would have been even stronger last year without the delta wave, which hit last summer. Delta was particularly troubling as it was on us shortly after the vaccine rolled out. We had hoped the pandemic was behind us, but delta dashed those hopes, weighing heavily on the collective psyche and economy.
And the delta is largely responsible for the biggest disappointment in the economy’s performance this past year: much higher inflation. The scrambling of global supply chains in the wake of the delta this summer is a big part of the higher than expected inflation. Delta has been particularly tough on Asia, where many supply chains begin, including for the auto industry, which depends on the semiconductors produced there. Without chips, auto production and inventory collapsed and vehicle prices skyrocketed. A similar dynamic has occurred for a wide range of products.
The pandemic remains at the heart of the economy’s outlook for the coming year. Even after the omicron wave has faded, there will likely be more. But each new wave is expected to be less disruptive to the healthcare system and the economy than the previous wave.
This would be in line with the trajectory of the pandemic so far. An increasingly vaccinated population, booster shots and new antiviral drugs and therapies should help ensure that while many more people get sick, there will be fewer hospitalizations and deaths. Businesses are also increasingly adept at managing through waves. They will be less likely to significantly disrupt their operations when the next wave hits.
Whether Washington lawmakers are able to come to an agreement and adopt a version of President Joe Biden’s Build Back Better agenda is also important to the outlook. The legislation, which includes spending increases and tax credits for social programs, from health care and housing to child and senior care to climate change, funded by tax increases on big business and the rich, is currently stuck in the political process.
After more Sturm und Drang in DC, some form of legislation should become law. If not, it will not be a game-changer for the economy, but if not, it will diminish the economy’s growth prospects and undermine the fortunes of low- and middle-income households.
I also rely on the Federal Reserve’s ability to skillfully adjust interest rates in response to rapidly changing conditions. If things hold up, as expected, Fed policymakers appear poised to start slowly raising rates by next summer. But they may have to adjust their plans, given the significant chances that neither the pandemic nor lawmakers will stick to the scenario. And these are the known unknowns. The Fed will almost certainly also have to grapple with some unknown unknowns.
But the most basic reason to be optimistic about the outlook for the economy is its uncanny ability to adapt to whatever throws at it. Despite the devastating pandemic, as it stands, it will not take more than three years for the economy to fully recover from the first wave of the virus. It’s a testament to the dedication of our healthcare providers and other front-line workers, the ingenuity of our pharmaceutical industry and medical technology, the massive collective response from federal, state and local governments, and the resilience of the American economy and people. .
Mark Zandi is Chief Economist for Moody’s Analytics.