The U.S. economy bounced back from its worst year since the Great Depression with one of the best years of growth in nearly 40 years in 2021. A combination of record stimulus, a healthy consumer, an accommodative Federal Reserve (Fed), vaccinations, and reopening of businesses all contributed to the big year.
In what amounted to the shortest recession on record, only two months in March and April 2020, the economy came back to produce what is currently expected to be over 5% GDP growth in 2021, more than making up for the 3.4% drop in GDP in 2020. Of course, there have been hiccups along the way. You cannot shut down a $20 trillion economy and then expect it to get going again without warming up first. Supply chain backlogs, materials and labor shortages, and higher prices all held the economy back to varying degrees. The good news is demand is still very strong, and as the backlogs unwind (which could take years in some cases), economic growth should continue into 2022. The U.S. economy should slow from 2021, most notably in the second quarter. Inflation is expected to tame from 2021 levels.
Globally, Europe and Japan were hit especially hard by the pandemic. But as COVID-19 cases potentially fall globally, those areas could be ripe for better economic growth in 2022. Meanwhile, emerging market economies may disappoint as growth in China could be constrained by regulatory crackdowns and a troubled real estate sector.
Fiscal and monetary policy played big roles in the economic recovery in 2021, but we see 2022 playing out as a handoff—from stimulus bridging a pandemic recovery to an economy growing firmly on its own, with consumer demand, workforce gains, productivity, small businesses expansion, and capital investment all playing parts in the next stage of economic growth.
The U.S. consumer deserves credit for continuing to drive the economy forward. It took retail sales only five months to get back to pre-COVID-19 levels after the lockdowns in March and April 2020. Bottlenecks and the Delta variant surge have done little to slow an eager consumer. With likely still low interest rates, increased equity in people’s homes, nearly $3 trillion in money markets (retail and institutional), and another $3.5 trillion in excess liquidity in bank accounts, the consumer should remain healthy in 2022.
Like every other time in history, those who adapt will survive. Businesses have already started to adapt to the new world, which may help productivity increase in 2022, as output-per-hour (productivity) potentially starts to accelerate again. Productivity allows for stronger growth and can help contain inflation, since more goods and services are produced. The 1970s was known as a time of high inflation, but it was also a time of very low productivity—fortunately a scenario that does not seem to be happening this time around.
Another key to the economic transition may be capital expenditures (capex). These include business investment in property, plant, equipment, and technology. These investments could boost overall productivity and output, but might take time to build, so the results could be years away in some cases. Additional capex spending would be one of the best ways to see if corporate America is indeed over the shock of the pandemic and ready to invest for future growth opportunities. Standard and Poor’s data shows capital expenditures are expected to have grown an impressive 13% in 2021 and likely even more in 2022. In fact, the capex rebound in this recovery has already been faster than after previous downturns. And it is not just a U.S. theme, as 2021 was likely the best year for European capex since 2006, and the global chip shortage has led to major investments in Japan and South Korea as well.
2021 was the year nearly everything was in a shortage, and it all translated to inflationary pressure. Record numbers of ships waiting at ports, a lack of materials, unfilled job openings, higher commodity prices, a lack of truck drivers, major backlogs, and supply chain disruptions all added to the larger price increases seen essentially across the board in 2021. These pressures are expected to decrease over the next year and inflation will eventually settle back to 2–2.5%. It will likely be a gradual process. Despite challenges around supply chains, hiring, and prices, if the demand is there it should help drive continued improvement as businesses adapt to address challenges.
This was not a typical recession. Some industries did better during the pandemic, while segments of other industries were severely constrained. Spending patterns shifted. Stimulus was delivered quickly on a massive scale. How strange did that make it? This was the first recession in history that saw FICO scores go up. Recessions are necessary to wash out the excesses, but some imbalances were not worked off this time around. For this reason, this economic expansion may not last as long as the record 10 years we saw during the last cycle. The average expansion since World War II has been just over five years.
The baseline economic outlook would likely provide a positive backdrop for equity markets, supporting further earnings gains while productivity gains potentially help offset some of the margin pressure from wage growth. At the same time, there are clear risks. Handoffs can be fumbled and with inflation running hot and risks around COVID-19 still in play, the potential for a policy mistake is elevated. And while we have made substantial progress against COVID-19, ranging from vaccines to treatments to public health policy, it remains to be seen how it will continue to impact the economy. Nevertheless, a continued move toward normality as the choices of businesses and households play a bigger role in determining the shape of the expansion.
The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Data provided by LPL Financial and the Stand and Poor’s.
- Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses.
- The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.