January 11, 2022

By Harris L. Kempner, Jr., President

We, in the United States, have been enjoying one of the strongest economic years since 1984. Take a look at the first three quarters of 2021 and the estimates for the fourth quarter.

2021 Y/Y%
        Est. Est.
  1Q 2Q 3Q 4Q Total
Real GDP 0.50% 12.20% 4.90% 7.50% 6.30%
+ GDP Deflator 2.10% 4.10% 4.60% 6.50% 4.30%
= Nominal Gdp 2.60% 16.30% 9.70% 14.00% 10.60%

So the entire year will probably come in at a 10.6% nominal growth, which is stunning. In particular, it is so because for the previous 15 years, we’ve been averaging about 3% nominal growth. What is happening? What are the reasons for this exceptional strength?
Basically, this is still a recovery from the depth of 2020. It is characterized by multiple factors:

  1. Easy monetary policy by the Feds;
  2. A relatively high inflation rate of +4.0% that helps the nominal GDP number.
  3. Strong fiscal stimulus by the Congress and the two Administrations;
  4. Increased job openings of approximately 11.5 million
  5. An unemployment rate that has already dropped to 4.2% in November, and is projected to reach in the low 3% in 2022;
  6. Very strong consumer income and consumer spending;
  7. Average hourly earnings hitting a 39-year high of 5.3%;
  8. Very rapid profit increases by U.S. businesses, which allow for extensive capital spending;

All of these factors and more, have led to an exceptional year for 2021 GDP. Many of them will continue to give the economy some strength in 2022.

However, there are now several factors which are militating against this extreme strength continuing in 2022.

The Omicron virus mutation, which is apparently less destructive but more transmissible than the Delta variant, is likely to be a headwind, particularly in the first quarter of 2022.

As importantly, the Fed is shifting its stance from ease to gradual tightening. This will eventually have a dampening effect on overall growth. The primary reason for this Fed change is their goal of reducing the demand side of inflation, which we believe will begin to succeed somewhat in 2022.

Certain of the previous fiscal stimulus programs referred to above will likely go away, including particularly expanded child credits and the student loan program.

The labor market is likely to be affected by greater supplies of people turning out to work next year, and we believe wage inflation will see its height in the first quarter of 2022, and then start downward as the supply increases. There will still be inflationary pressures from labor but not as severe as they have been in the very recent past.

The supply side for goods will come into more balance during this year as supply chain issues are gradually resolved. This is particularly true in autos, which has been a major contributor to inflation because demand has remained solid, but supply has been hampered by chip shortages. This area is certainly going to reduce inflation later.

All these headwinds will reduce the GDP some from 2021’s extreme strength. However, we forecast that the U.S. economy is still going to remain quite strong in 2022 when compared to the 15 years preceding 2021. The momentum of the recovery is still in place. Our projection is for U.S. GDP for the year 2022 to be 7.5% nominal, of which 4% will be real and 3.5% will be inflation.