While the United States continues to grapple with inflation rates not seen in decades, a huge number of open positions and the specter of a deepening European war, several experts weighed in at recent local events as to why there are reasons to be optimistic for 2022.
At the Feb. 24 annual Lyons Companies/University of Delaware Economic Forecast, Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, highlighted the strong U.S. gross domestic product growth last year, the increasing number of hires and the falling unemployment rate. She said she expects the economy to “expand at an above-trend pace despite facing some challenges” through the rest of the year.
Inflation
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Loretta Mester | PHOTO COURTESY OF THE FEDERAL RESERVE[/caption]
With rising wages, supply side challenges and consumers flush with stimulus cash and boosted investments, one issue where the experts differed is how much inflation will temper this year.
Mester, a voting member of the Federal Open Market Committee (FOMC), which determines the nation’s all-important benchmark interest rate, noted that the FOMC predicted annual 2021 prime consumer expenditure inflation of 1.8% in December 2020 but ended the year at 5.3%. She said she was cautiously optimistic to start 2022.
“I do expect some improvement in inflation readings later in the year as demand moderates and capacity constraints in both product and labor markets begin to ease. Nonetheless, I expect inflation to remain above 2% this year and next, and I see the risks to inflation as tilted to the upside,” she said.
Mester said she was in favor of raising the core Fed fund rate by 0.25 percentage points at the FOMC’s March meeting as well as future increases this year, as needed. If inflation was not abating as expected by mid-year, she would support raising the interest rate “at a faster pace over the second half of the year.”
“Monetary policy cannot alleviate the constraints on supply, but it can help to moderate demand by making broader financial conditions less accommodative, thereby reducing inflationary pressures,” she added.
Anirban Basu, CEO of Baltimore-based economic analyst firm Sage Policy Group and a Johns Hopkins University lecturer, told the New Castle County Chamber of Commerce in his Feb. 18 annual economic forecast presentation that he predicts the year’s inflation to end between 3% and 4%, though probably closer to the higher mark, with the Fed raising interests around seven times. He told leaders to expect to face inflationary pressures “for quite some time,” and criticized the Federal Reserve for believing inflation would be transitory for too much of last year.
“This will be a year of growth, I would say 3% to 4% GDP growth … the economy will remain unbalanced, however, with supply struggling to keep up with demand,” he added.
Labor challenges
Despite months of continued job gains, Mester opined that “labor markets are likely to remain tight for some time,” citing pandemic-related factors, including child and elder care responsibilities and fear of the virus, as well as a longer-term impact of Baby Boomers heading toward retirement – and some starting earlier than expected due to the pandemic.
“Labor markets are very, very strong, and I personally believe that labor force participation will continue to grow on the current level,” she told the summit, noting that there are millions of fewer jobs than before the pandemic though. “We've also not had to have as much immigration as we used to, which also affects the labor market. So, I think what we have to recognize is that a tight labor market is not going to magically disappear anytime soon and we have to sort of take that into account.”
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Economist Anirban Basu addresses the New Castle County Chamber of Commerce at its 2020 summit. | DBT PHOTO BY JACOB OWENS[/caption]
It was a point that Basu agreed with, though he expects the labor market in northern Delaware to get back to pre-pandemic levels this year.
“I would expect to see more labor force participation for the year ahead. Why is that? Because people have bills to pay and inflation is making those bills bigger,” he noted.
While service industries like hospitality and retail have struggled to find jobs, Basu noted that remote working has helped drive growth in professional services, about 511,000 jobs nationwide. It was one of two sectors, along with transportation and distribution to support the e-commerce boom, that actually added net jobs through the pandemic.
Those sectors also helped drive job growth in the greater Wilmington metro area, which has actually added 2,900 jobs post-pandemic, according to Basu’s research.
“Wilmington metro has done quite well … and I think the business climate in New Castle County and in Wilmington has really played a part. It’s a business-friendly environment,” Basu said.
Commercial real estate
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Hilary Provinse | PHOTO COURTESY OF BERKADIA[/caption]
Hilary Provinse, executive vice president and head of mortgage banking for Berkadia, who has spent time on Wall Street as well, detailed for the Lyons/UD summit last year’s record-breaking real estate market.
“2021 saw the largest amount of transaction volume and interest in commercial real estate in the history of the market, and we're anticipating … an additional 5% to 10% increase in activity this year,” she said.
The surge in deals comes as investors are flush with cash and a lot of people view [real estate] as a hedge against inflation, Provinse said.
“Owners of properties can generally raise rents or their lease costs to keep pace with increasing costs,” she explained.
Provinse predicted that an increasing number of companies will soon mandate a return to office and that will drive the demand in the office sector.
“One interesting fact here, few businesses have actually cut their office leases this year. So, although we're all thinking about it, no one has actually changed their lease terms in a dramatic way,” she said.
That was an outlook not shared by the more bearish Basu, who cited worker surveys that found overwhelming majorities of people preferred to work for companies that allowed flexible schedules with remote work. Such a change in worker preference would fuel more employers to downsize their space, he opined.
“In terms of commercial real estate, I would say there's an issue,” he said, emphasizing the vulnerabilities of the office market.
Future concerns
Mester said the Federal Reserve was monitoring the Russian invasion of Ukraine, and what economic implications the war may have. Oil shipments from Russia have been disrupted while grain shipments from both countries will likely be as well, although America is not a primary market for either.
“Geopolitical events add upside risk to the inflation forecast even as they put some downside risk to the near-term growth forecast,” she said.
Basu was also asked whether he was concerned about America’s rising debt level, which crossed $3 trillion last year and represented more than 12% of national GDP. He said that debt growth was “very significant,” but bond investors disagreed.
“Effectively, [bond buyers] are financing America's budget deficits at a very low rate of interest,” he said. “It’s not a crisis until the bond market says so and right now the bond market isn’t saying so.”
However, Basu noted that current estimates peg the Medicare Trust Fund to go insolvent in 2026 and the Social Security Trust Fund to do the same around 2033.
“So debt service is about to go up; we Americans have less money to spend on things like infrastructure, education, national defense, homeland security, etc., and that's an issue,” he said. “So even if we avoid a full-on bond market crisis this really threatens the growth of American prosperity. I think it’s a big deal.”
