As we wrap up another year to remember — or to forget — we are given the opportunity to reflect. Reflect on the wins, the hopes, the mistakes, the regrets, and the money that may have played a role in all of it. And in that reflection, we plan for a better us in the new year. Luckily, we have savvy economists do the same for our economy. With their help, we are forecasting what economic trends and influences to expect for 2022.
Despite operating in an economy that has been anything but predictable in the past twenty-two months, 2022 will likely bring a period of recovery and growth. Now let's take a look at the predictions of the individual facets that make up our economic landscape.
Economic Forecast: 2022
The Housing Market
We will finally see a cool down in what was one of the hottest seller's markets in history. But not by much.
The period of homes selling at a record pace with dozens of competing bids within hours of listing, thousands of dollars over asking price, and all-cash offers is starting to decelerate; however, the winner of the 2022 housing market remains the same: the seller.
The record-low mortgage rates that started the year will continue to rise following The Federal Reserve's push to curb inflation. Available homes will continue to be hard to come by, especially those under $200,000. According to Realtor.com, inventory is only forecasted to grow 0.3% in 2022. The lack of choices will cause buyers to aggressively compete to purchase homes or settle for rental properties. The lack of choices will also continue to hike up home prices, pushing many first-time buyers out of the market. According to the National Association of Realtors' annual survey, median home prices are projected to increase by 5.7% next year.
The high demand for homes brings no relief to renters either. While some cities in the U.S. are advocating for rent control policies to be enacted, renters will see a 7% increase in rents nationwide. In addition to the home shortage, this will be primarily due to the influx of people moving back into cities as the pandemic plateaus, and the booming labor market that gives people the flexibility to work remote or move to another city on the company's dime.
The Supply Chain
2022 will still feel the ripples from the ongoing supply chain crisis, but not to the extent felt in this past year. If 2021 can be summed up as excess demand and lack of supply, then consider 2022 the scale that will attempt to balance them out. This banks on the hope that a receding pandemic will allow consumers to spend more of their money on services instead of on physical goods, and keep their money in their community. The shutdowns seen in the early days of the pandemic pushed people away from buying local and buying experiences, and in turn put strain on our supply chain's capacity for shipping, delivering, and overall manufacturer availability. Add in clogged canals and understaffed ports and we've created a lasting disruption into the new year and possibly years to come. Luckily, the exposed fractures and holes in the world's supply chain has caused a shift towards deglobalization and companies to trend toward domestic sourcing.
The Environment
With the supply chain's deglobalization comes the climate's decarbonization — otherwise known as the reduction of carbon dioxide emissions for my non-science enthusiasts. This transition also comes in response to climate change that demands attention from science and non-science enthusiasts alike. Climate change is bringing more disruptive weather events, causing millions in damage and a rise in goods. From the February freeze in Texas that cost about $130 billion in financial fallout and at least 111 lives, to the first-ever declared water shortage of Lake Mead that will forever change the future of agriculture in the West and the water supply available to over 40 million people.
While the pandemic forced funds to neglect green initiatives in favor of tax credits and public funding, 2022 will see a redistribution of those promised funds. Sustainable actions have shifted from a luxury to a necessity. In addition to localizing purchasing and manufacturing from consumers to corporations, President Biden signed a bipartisan $1 trillion infrastructure bill that will pour money into improving the nation's roads, ports, and power lines. The upgrades are meant to boost economic growth over time with leaner supply chains, more equitably distributed transportation services and internet access, and improved environmental and individual health. So, if you notice more road construction in your neighborhood, now you know why.
The Job Market
From one of the highest periods of unemployment since The Great Depression, to a country-wide labor shortage going into the new year, the job market currently favors potential employees. This year and a half development can be blamed on older Americans accelerated retirement, workplace safety concerns, the shift to remote work, and the demand for higher wages and better benefits.
Wages rose at an annualized rate of 4.8% in November and the number of job openings stands at 11 million. From an unemployment rate of 14.8% back in April of 2020, to 4.2% wrapping up 2021, unemployment is expected to fall further to 3.5% by the end of 2022. So if you've been looking for a career change in the coming year, the odds are in your favor. If you're hiring as a small business owner, not so much.
In Minnesota, the non-seasonally adjusted unemployment rate is 2.2% as of November 2021. This is the third lowest reading on the MN Deed website going back to 1976. All indications are that the job market will continue to be tight and Minnesota small business owners will have to emphasize staff management, company culture, and operation productivity more now than ever. Investments in new technologies and equipment to improve productivity will be emphasized over the coming year.
Economic Risks for 2022
Omicron and More Lockdowns
The new COVID-19 variant throws a wrench of ambiguity into 2022's economic forecast. The more contagious Omicron could bring about hesitancy to gather and lockdowns worldwide in countries pursuing a zero COVID strategy. Lockdowns that have kept people out of work, publics spaces, and spending more money on goods instead of services. Meaning, the world's supply problems and labor shortages could remain. However, if Omicron is less dangerous than its predecessors, then a rebalance of spending on goods and services would boost global economy growth to 5.1% per data from Bloomberg Economics.
The Threat of Further Inflation
We are ending 2021 with almost 7% inflation rates. Our perfect cocktail of high demand for goods, industry shutdowns, and all-time low interest rates are to blame for the highest consumer inflation rates since the early 1980s. 2022 will be a year of action from the Federal Reserve Bank's FOMC Committee.
Instead of funneling money back into the economy when companies were in the peak of layoffs and furloughs, the Fed is switching tactics to shifting away from amendable monetary polices and raising interest rates. While the Fed believes some of that inflation is going to cool off into 2022, sticky residential rent prices and low labor will have a heavy influence in continuing to drive inflation numbers.
Pull-Back of Public Spending
While the purse-string tightening from Federal Reserve Bank will help cool inflationary pressures, it is anticipated that there will be less support for public spending programs and higher financing costs to provide them. Many of these public programs drove GDP growth and could be detrimental to some of the world's key economies and continuing to raise GDPs.
2022: A Year of Rebalancing
If 2021 taught us anything, it is the resilience of the American economy, the ingenuity of its people, and that nothing will stand between a consumer and their desired goods. Two years in the making, 2022 will be a rebalancing act where we will see what lessons were learned while operating in a world of changing COVID variant dynamics, economic constraints, and fluctuating consumer and business demands.
May the reflections of 2021 and the Economic Forecast of 2022 guide you in your financial goal setting and new year's resolutions. If you are looking for a more clear crystal ball on financially preparing for next year, talk with a lender today.
