Market Perspective

The Great Balancing Act: These Are the Economic Forces Shaping 2022

March 11, 2022
The C2FO Team

Feeling confused and dismayed by the rapid shifts and swings in the global economy? You’re not alone.

Economic changes are being driven by a handful of underlying trends that business leaders and policymakers are trying to bring into balance. In a recent webinar with C2FO, Eric Kelley, executive vice president and director of research for UMB Bank, explained how these forces are shaping the global economy and what the rest of 2022 could look like as a result. 



COVID-19 risk appears to diminish 

The pandemic has destabilized almost every aspect of life around the globe for the past two years. Fortunately, infection and death rates from the most recent omicron variant are rapidly improving in many countries. 

This doesn’t mean that some new variant won’t appear, but people seem to have become more resilient and better able to adapt to new waves of the disease.

A tight labor market is still with us

While COVID might be less of a problem, one of its biggest side effects — an incredibly tight labor market — is still causing problems.

Right now, the United States has a labor force participation rate of roughly 62%, compared to 63% before the pandemic. That 1% might not seem like a lot, but it’s the equivalent of 3 million to 4 million people leaving the job market.

That’s a big problem when you consider the US has more than 10 million open jobs but only 6 million unemployed people.

“If you get 2 million of those people, 3 million, back in the workforce, that closes this gap pretty dramatically,” Kelley said. “But this gap is like nothing we've ever seen before. Our country has never been in a situation like this.” 

Companies may need to look at greater levels of automation and increased investments in upskilling and training to mitigate the labor crunch. 

Greater household wealth leads to greater consumer demand

Why have so many people removed themselves from the job market? Part of it has to do with the $5 trillion in government stimulus that was released during the pandemic.

Some of those funds helped support consumer demand, but it appears that a lot of it went into savings. So younger workers — who would otherwise be in the job market — may have enough cash to not look for a job right away. They should come back as those savings dwindle and demand increases.

At the same time, US households overall are experiencing notable gains in personal income and household net worth.

“We've never had a spike this dramatic at this rate in net worth, but if you just add up liquidity, cash reserves, income and net worth … it tends to lead to huge demand increases,” Kelley said.

The supply chain is strained, but it’s not all bad news

Specifically, Americans started buying more goods than services. Combine that with COVID-related restrictions and a tighter labor market, especially at ports and among truck drivers, and suddenly, there are issues with the supply chain.

“The labor challenge is exacerbated because there's this huge demand problem,” Kelley said. “It's kind of weird to call healthy demand a problem, but right now it sort of is.”

The good news is many of these purchases have been for durable goods like automobiles and appliances – things a consumer might buy once every four or five years.

“So just the natural economics of it, it should be going our way,” Kelley said. “The flow of new orders should taper off and allow some of these backlogs to clear,” probably through the second half of 2022.

Higher debt could fuel higher demand and inflation

Meanwhile, US public debt has skyrocketed to $30 trillion, due in part to the stimulus. A few years ago, it was around $18 trillion. The country’s debt-to-GDP is 123%, the highest since World War II and its aftermath.

“We hit this level” after World War II, Kelley said. “And then from there, we went straight down because we stopped the deficit spending and our GDP took off, and our debt-to-GDP ratio plummeted back to more normal levels. We are not planning on doing that this time. The plan this time around is that debt ratio is just going to keep going higher and higher and higher.”

Some economists say that’s not a risk so long as nominal GDP outpaces the cost of debt. One potential concern: Higher debt means higher liquidity, but also higher demand and higher inflation. (On the other hand, Kelley noted, the market is forecasting a return to annual inflation rates of 2% in the coming years.)

“We shall see,” Kelley said. “Maybe they will be correct, and it will all work out just fine even if you have a serious inflation problem that pushes rates a lot higher.”

A new risk: the crisis in Ukraine could disrupt things further

One of the biggest question marks is the Russian invasion of Ukraine. In addition to being a massive humanitarian catastrophe — which should be everyone’s main focus — the invasion also injects uncertainty into the global economy.

Higher inflation is likely, Kelley said, but Ukraine and Russia have relatively small economies, which should translate to less exposure to the global economy. He estimates there’s a 70% chance the economic impact is mostly contained to that region.

There’s still some risk of a larger economic crisis. Europe faces greater exposure, and it’s not impossible that the situation could grow into a global slowdown. There’s also a nonzero risk the conflict could escalate militarily.

But it’s good to keep in mind that, economically, things tend to recover quickly after modern crises. Look at the stock market.

“We typically are down during them, and we're typically up quite dramatically three months later,” Kelley said. “That is because, in the modern era, most of these geopolitical events tend to be very regionally located and very regionally focused, and they tend to not cascade out into a global economic impact.”

What can we expect from the rest of the year?

Kelley made the following predictions about the rest of 2022.  

  • US GDP will grow by 3.8% this year and 2.5% in 2023 — a slower pace than 2020’s growth of 5.7%.

  • The Federal Reserve will raise the federal funds rate to 1.25% or 1.50% by year’s end.

  • The S&P 500 Index could grow by 7% to 10% in 2022, compared to 28.7% in 2021. That’s not necessarily bad news, Kelley said. Recent selloffs in the stock market have brought a necessary correction to stock prices.  

  • Home prices could grow by 10% — not as bad as the nearly 20% recorded in 2021, but still very high. The US is at least two years away from filling its backlog of new homes.  

To watch a recording of the presentation, click here.

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