The US economic outlook for 2022 in five charts

Reading the signs: as we wrap up the final quarter of 2021, what are the leading indicators of economic performance telling us about what 2022 has in store?

The economic landscape in the United States and around the globe is still being severely affected by the Covid-19 pandemic, although the US economy has remained comparatively upbeat.

The advance estimate of the gross domestic product (GDP) figures from the third quarter of 2021, released at the end of October by the Bureau of Economic Analysis (BEA), showed annualized growth of 2.0%.

The third quarter figure is significantly lower than the 6.7% in the second quarter and shows that the US economy slowed significantly down in the third quarter. While the third-quarter figure is lower than the previous four quarters, it is in line with the 1.9% for the final quarter of 2019, and thus indicative of economic growth similar to more “normal” economic conditions than those of the immediate post-pandemic period.

Increasing inflation and high level of job openings, on the other hand, indicate a period of high growth – showing lingering economic effects of Covid-19.

Looking ahead to 2022, we’re seeing signs of stubbornly high inflation rates, slowing retail growth and other indicators of slow growth. Read on for our analysis of five indicators of economic performance in 2022 – inflation, earnings growth, house sales, retail sales and job openings.

Inflation stickier going into 2022

At the peak of the Covid-19 pandemic in early 2020, oil prices crashed, consumer demand plummeted and inflation fell to almost zero.

Inflation figures were promising during autumn 2020, with a slight slowdown later on, but 2021 has moved at different pace. The headline consumer price index (CPI), which measures average month-over-month changes in prices paid for consumer goods and services, was 0.5% in July, 0.3% in August, 0.4% in September and 0.9% in October, respectively. This translates to year-over-year inflation of 5.3%, 5.2%, 5.4%, and 6.2% for those months, pointing to continued significant inflationary pressure.

Inflation became “stickier” in 2021 as Covid-19-related changes to the economy, such as labor shortages and supply chain disruptions, took hold and reshaped the economy more permanently. We expect inflation to wane at a slower pace in 2022 than it did in 2020.

Due to the pace and stickiness of inflation, current expectations are that the Fed would increase rates as soon as the first half of 2022, possibly even sooner; this will be incorporated into our forthcoming forecast revision. The inflation data is being viewed by the financial markets very carefully.

Earnings continue to grow

Average earnings in the US increased month over month by $0.11 per hour in July, by $0.12 per hour in August, by $0.12 per hour in September and by $0.11 per hour in October. The July-October changes correspond to 4.0%, 4.1%, 4.6%, and 4.9% year-over-year growth respectively. The increasing earnings figures in this four-month period indicate real inflationary pressure, which is something to keep a close eye on.

Retail sales growth is slowing

In the third quarter, a significant change from the previous quarter was the loss of goods consumption as a driver of GDP growth. The consumption of goods contributed -2.11 percentage points of the GDP growth, a significant decrease from 2.99 percentage points in the previous quarter and 5.69 percentage points in the first quarter. Consumption of services contributed to 3.29 percentage points, which is also less than the 4.93 percentage points in the previous quarter.

Job growth elevated but slower than earlier in 2021

We are now facing the symptoms typical of an overheating economy, such as high job openings and increasing inflation. The employment situation deteriorated significantly due to the Covid-19 lockdowns and recession. By calculating the sum of the monthly net changes in 2020 and the first 10 months of 2021, the number of jobs lost remains at 3.6 million, according to the latest data.

The job market, which appeared to be accelerating during the summer season, cooled significantly in September and October. The market added 1,091,000 jobs in July, but only 483,000 in August, 312,000 in September and 531,000 in October. Given that the US civilian labor force in February 2020 was approximately 164 million, the 3.6 million lost jobs represented 2.2% of the total.

However, the size of the labor force has reduced significantly and in October was estimated at 161.5 million, down 2.5 million. In the household survey, unemployment this year was at 5.9% in June, 5.4% in July, 5.2% in August, 4.8% in September and 4.6% in October. In the growth period after the 2008/09 financial crisis, the unemployment level finally retreated to 5.2% in February 2017.

It is important to note that while unemployment has improved significantly, the labor force participation rate still remained low in June, July, August, September and October at 61.6%, 61.7%, 61.7%, 61.6% and 61.6%, respectively. The October level is 1.7 percentage points below the figure posted in February 2020.

Existing and new house sales improve

Sales of existing homes for September 2021 increased to 6.29 million (SAAR) from 5.88 million (SAAR) in August, showing a 7.0% month-over-month increase but a 2.3% year-over-year decrease. New home sales for September were at 800,000, a 14.0% increase from the revised 702,000 in August, but 17.6% below September 2020. The existing inventory was at just 2.4 months of supply in September, 0.2 months lower than in August and 11.1% lower than the 2.7 months recorded a year ago.

Strong demand and a lack of inventory continued to support the upward trend in home prices. Housing supply is seen to be the key driver for the relatively low existing home sales. According to the National Association of Realtors, the median existing home price increased by 13.3% in September from a year ago, marking the 115th consecutive month of year-over-year growth.

The housing sector regained traction earlier this year, although the lack of supply and earlier movements in mortgage rates have had an impact. Housing construction has the potential to improve further once the economy gets fully back on its feet and shows significant promise for becoming a supportive growth generator for the US economy once it has properly recovered from the pandemic-induced economic tremors.

Our outlook for 2022

The preliminary figures of our upcoming economic outlook projects the US economy will grow by 5.6% in 2021 and by 3.8% in 2022. The forecast will continue to be adjusted based on the most recent data and news and remains somewhat cautious with the downward update from earlier due to slightly overestimated growth in third quarter.

We remain somewhat restrained due to the remaining high level of uncertainty, although the current outlook for the US economy is certainly positive despite the clouds of inflation and overheating hanging around. Government packages are expected to support the economy. Higher growth is projected for the final quarter of the year, and that effect should then carry over to some degree into 2022.

With the economy remaining fragile due to an evolving crisis, it is important to remember that the risks related to this forecast are high because new data coming in may change the outlook substantially. Likewise, the measures taken during such times can also rapidly change the economic outlook considerably.

Judging by the real indicators, the US economy continues moving ahead out of a short but very deep recession back to normal speed via a growth surge and the pace has now slowed down from that.

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