2021 State of the Economy: Positive vibes

The economic forecast for 2022 promises a largely favorable operating environment for businesses of all sizes as the nation benefits from steady growth in goods and services.

Tail winds include a decline in unemployment numbers, rising wages, a booming housing sector, fat corporate profits, aggressive capital investment and generally easy capital sourcing.

“We are in the midst of an early economic recovery after the body blow of COVID-19,” says Bernard Yaros Jr., assistant director and economist at Moody’s Analytics. “Though growth will decelerate in 2022 due to fading effects from business re-openings and past fiscal stimulus, the economy will remain robust.”

The numbers tell the tale. Moody’s Analytics expects real gross domestic product to grow at a healthy 4.3 percent in 2022. While that is a bit less aggressive than the 6 percent of the past 12 months, it remains decidedly sunnier than the 3.4 percent pandemic-fueled decline of 2020.

Profits grow

Businesses tend to benefit from a healthy economy, and Moody’s Analytics expects corporate profits to increase by some 4 percent in 2022.

While that figure might seem unremarkable in isolation, it represents a hefty advance over the difficult comparisons of 2021, when profits spiked 35 percent. Clearly, business owners are glad to bid adieu to the pandemic-battered 2020, when their profits declined 3 percent.

Headwinds, of course, are inevitable. And 2022 will have its own troubling mix: the peekaboo pandemic. Labor shortages. Crippled supply chains. China tariffs. Nascent inflation. An unsettled consumer. Yet economists do not expect negatives to prevail.

“While the delta variant is continuing to do some damage, we expect this wave of the pandemic to soon subside and for any future waves to be successively less disruptive,” Yaros says. “Labor and goods shortages will ease as the domestic and global economies increasingly learn how to live in a new pandemic normal.”

Furthermore, heftier earnings should help companies weather the coming year’s array of challenges.

“Corporate profit margins have been running somewhat above their five-year average of 11.1 percent,” Yaros notes. “That should provide some ability to absorb price pressures that have developed from rising commodity prices and global supply chain issues.”

Sales recover

Business owners tend to confirm the economists’ sunny reports.

“Most of our members have seen a healthy return of revenues and are doing about 90 percent of their pre-COVID business,” says Tom Palisin, executive director of The Manufacturers’ Association. “Many have actually gone into hiring mode.”

Aggressive hiring is improving the nation’s employment level, a key driver of the consumer sentiment so vital to the nation’s overall business health.

“Unemployment has been declining pretty steadily,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “Jobs are being added at a rate that prior to the pandemic would be viewed as astoundingly good.”

Unemployment is expected to be as low as 4.5 percent when 2021 figures are finally tallied, and should decline to 3.4 percent by the end of 2022, a level not far from the “full employment” conditions of the pre-pandemic economy.

Wage hikes

Any tight labor market is likely to spark wage hikes – yet another driver of positive consumer sentiment. Today’s economy is no exception.

“We have seen a significant increase in wages over the past year – as high as 20 percent to 25 percent for lower hourly entry-level employees or machine operators,” Palisin says.

Nationwide, increases are running lower, due to normalization of wages in some industries.

“In 2022, we’re looking at 2.6 percent growth in the employment cost index, compared with 2.9 percent for 2021 and 2.6 percent in 2020,” Hoyt says.

Wage rates aren’t the only component of an employer’s labor cost. Toss into the mix a greater number of people employed, a greater number of job positions filled, an increased number of hours worked and the total comes to what economists dub “wage and salary income.” And it’s clear that employers nationwide will be shelling out more of that in the coming 12 months.

“In 2022, we’re looking at about 4.6 percent growth in wage and salary income, coming off a 7 percent increase in 2021, which was up from the 1.3 percent of 2020,” Hoyt says.

All that additional income should encourage greater consumer spending, a key driver of a healthy economy. And signs are that people have saved up considerable sums of cash that are ready to be spent. Throughout 2020 and early 2021, after-tax income rose much faster than had been anticipated prior to the pandemic. The reason was massive fiscal stimulus in terms of federal economic impact checks and expanded unemployment insurance payments. At the same time, consumer spending ran lower than anticipated.

“People now have a huge amount of savings,” Hoyt says. “Furthermore, consumer credit card borrowing has been weak, leaving consumers more flexibility to borrow money going forward if they choose to.”

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