Here is a review of the Ten Economic Questions for 2021
Below are my ten questions for 2022. These are just questions; I’ll follow up with some thoughts on each of these questions.
The purpose of these questions is to provide a framework to think about how the U.S. economy will perform in 2022, and if there are surprises – like in 2020 – to adjust my thinking.
1) Economic growth: Economic growth was probably around 5.5% in 2021 as the economy rebounded from 2020. There will be a drag from fiscal policy in 2022, and monetary policy will be less accommodative. The FOMC is expecting growth of 3.6% to 4.5% Q4-over-Q4 in 2022. How much will the economy grow in 2022?
2) Employment: Through November 2021, the economy added 6.1 million jobs in 2021. This makes 2021 the best year for job growth ever – by far. However, there are still 3.9 million fewer jobs than in February 2020 (pre-pandemic). Will the remaining jobs lost in 2020 return in 2022, or will job growth be sluggish?
3) Unemployment Rate: The unemployment rate was at 4.2% in November, down 2.2 percentage points year-over-year. Currently the FOMC is forecasting the unemployment rate will be in the 3.4% to 3.7% range in Q4 2022. What will the unemployment rate be in December 2022?
4) Participation Rate: In November 2021, the overall participation rate was at 61.8%, up year-over-year from 61.5% in November 2020. Long term, the BLS is projecting the overall participation rate will decline to 60.4% by 2030 due to demographics. Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020)? What will be the participation rate in December 2022?
5) Inflation: Core PCE was up 4.7% YoY through November. This was the highest YoY increase in core PCE since 1989. The FOMC is forecasting the YoY change in core PCE will be in the 2.5% to 3.0% range in Q4 2022. Will the core inflation rate increase or decrease by December 2022?
6) Monetary Policy: In response to the pandemic, the FOMC cut rates to zero, and initiated an asset purchase program in March 2020. The FOMC is currently on pace to stop the asset purchase program in March 2022. A majority of FOMC participants expect three rate hikes in 2022. Will the Fed raise rates in 2022? If so, how many times?
7) Residential Investment: Residential investment (RI) was a slight drag on growth in 2021, because investment was so strong in the 2nd half of 2020. Through November, starts were up 16.3% year-to-date compared to the same period in 2020. New home sales were down 6.5% year-to-date through November. Note: RI is mostly investment in new single-family structures, multifamily structures, home improvement and commissions on existing home sales. How much will RI change in 2022? How about housing starts and new home sales in 2022?
8) Housing Credit: Will we see easier mortgage lending in 2022? Will we see a further sharp increase in mortgage equity withdrawal (MEW)?
9) House Prices: It appears house prices – as measured by the national repeat sales index (Case-Shiller, FHFA, and CoreLogic) – will be up around 18% to 20% in 2021. What will happen with house prices in 2022?
10) Housing Inventory: Housing inventory decreased sharply during the pandemic to record lows in early 2021. Will inventory increase as the pandemic subsides, or will inventory decrease further in 2022?