The top headline numbers suggest that the U.S. economic recovery is humming along, although underlying issues throughout the economy are sparking concern among a growing number of economists and market analysts.
On the surface, the jobs market, consumer spending, and gross domestic product are improving. However, once you begin to scratch beneath the surface, there are plenty of problems threatening the post-pandemic infrastructure, experts warn.
Market observers are combing through a series of trends and data points to spotlight core issues that might derail President Joe Biden’s “Build Back Better” agenda or slow the post-COVID-19 recovery. And it might be more than inflation.
The Labor Market
In November, the U.S. economy added 210,000 jobs, falling short of the market forecast of 550,000. The unemployment rate fell to a better-than-expected reading of 4.2 percent.
Analysts are looking at the largest context of the jobs market.
While average hourly earnings rose 4.8 percent year-over-year, climbing to $31.03 per hour, real wage growth has been eliminated in most sectors of the economy because of surging inflation.
Job openings surged to nearly an all-time high of 11 million in October, as 4.2 million workers quit their jobs last month. The labor force participation rate remained near a five-decade low.
There are still 4 million to 6 million fewer jobs than before the pandemic. Moreover, a wide range of surveys suggests that employers are having trouble finding workers for unfilled jobs, with jobless benefits discouraging many of these workers.
The Bureau of Labor Statistics (BLS) estimates that more than 4 million Americans are “underemployed.” This is a measurement that classifies people in the labor force as underemployed if they are working less than full time or are employed at positions that don’t utilize their skills.
Unit labor costs advanced 9.6 percent in the third quarter, but non-farm productivity slumped 5.2 percent during the same July-to-September period.
Some experts are anticipating other worrisome developments in 2022.
According to the Committee to Unleash Prosperity (pdf), the expanded pandemic-era unemployment benefits, and the myriad of other financial assistance programs, allow many Americans to earn more than they had in their previous positions.
Researchers predict that President Joe Biden’s “Build Back Better” Act could potentially disincentivize work because of the many support provisions inside the legislation. For example, Casey Mulligan, a University of Chicago economist, forecasts that the president’s chief economic program would slash full-time equivalent employment by about 6 percent.
“The bill would implement the single largest permanent increase in work disincentives since the income tax came into its own during World War II,” Mulligan wrote in a report. “The bill would also reduce work by limiting competition in the labor market, imposing employer mandates, distorting childcare markets, and increasing consumer prices for telecommunications, energy, and other products. All of these disincentives go on top of those already in the baseline due to a continuing portfolio of federal, state, and local tax, spending, and regulatory policies.”
Still, some on Wall Street are optimistic about the current state of the labor market.
“Although total payroll employment in the U.S. remains 5 million workers short of pre-Covid levels, other dimensions of the labor market have rarely been as favorable for workers. As companies face labor shortages, employers are making a serious effort to recruit workers by offering signing bonuses, additional benefits, and—most importantly—higher compensation across the income distribution,” Morgan Stanley wrote in a research note.
The Cost of Shelter
Last year, housing costs, including rent and utilities, accounted for about one-third of the average individual’s budget. Both components have risen significantly this year.
Rents for shelter surged 3.9 percent year-over-year in November. Electricity prices climbed 6.5 percent.
Apartment Guide’s 2021 Rent Report discovered that the national average for one-bedroom apartments rose 20 percent year-over-year to $1,670 in November.
“While the pandemic saw a drastic decrease in rents, the trend quickly reversed as renters, both new and old, returned to cities,” the Apartment Guide stated.
When it comes to homeownership, the Federal Reserve found that the real estate market entered a bubble for the first time since 2007. The U.S. central bank recently updated its second-quarter Exuberance Index, finding that buyers are paying higher premiums for residential properties.
A recent Consumer Affairs survey found that 40 percent of homeowners with mortgages reported working second full-time jobs to afford growing housing expenses. The study also revealed that a majority of respondents said they weren’t able to afford their housing expenses.
This has industry observers calling this demographic “house poor” homeowners, households with small savings after covering their mortgage payments and related monthly costs.
Housing experts are split as to whether real estate prices will accelerate or slow down next year.
“The supply-demand picture that has been the basis for our call for a multi-year boom in home prices remains intact,” Goldman Sachs wrote in an October report. “Housing inventories remain historically tight, while homes remain relatively affordable despite the recent price increases, and surveys of home buying intentions remain at healthy levels. Our model now projects that home prices will grow a further 16% by the end of 2022.”
Home prices rose 19.5 percent in September year over year, down from a 19.8 percent increase in August, according to the S&P CoreLogic Case-Shiller.
“At 19.5%, the pace of growth slowed 30 [basis points] from the month prior—though it still marks the third-highest print on record. We expect the slowing to accelerate next month as it appears to be growing more pervasive geographically,” Morgan Stanley stated in a research note.
What Do US Consumers Think?
The Federal Reserve Bank of New York (FRBNY) published the November Survey of Consumer Expectations on Dec. 13. The monthly snapshot highlighted that Americans don’t anticipate relief for their wallets in 2022.
According to the November 2022 report, consumers believe inflation will stay at around 6 percent by the end of next year.
The median expectations for inflation in three years eased to 4 percent.
When asked if inflation or unemployment was the most pressing issue facing the country, 76 percent chose inflation, Richard Curtin, the survey’s director, noted.
On the labor front, the probability of losing employment over the next 12 months rose 13 percent, slightly below the pre-pandemic reading of 13.8 percent. More than one-third of people thought unemployment would be higher next year.
They found that nearly 28 percent of U.S. consumers expect their household to be somewhat or much worse off financially one year from now. Close to 26 percent think they will be somewhat or much better off, while about 45 percent expect their financial situation to be about the same.
2022: Bullish or Bearish?
What lies ahead for the U.S. economy over the next year? It might depend on who is making the predictions.
Goldman Sachs trimmed its GDP forecast for 2022, with the financial institution expecting growth to be 3.8 percent on a full-year basis. The biggest risk that could weigh on economic activity, the Wall Street giant says, is the Omicron variant.
“The emergence of the Omicron variant increases the risks and uncertainty around the U.S. economic outlook,” economists said in a note. “While many questions remain unanswered, we now think a moderate downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely.”
However, JPMorgan Chase thinks “2022 will be the year of a full global recovery,” citing greater immunity to COVID-19, new vaccines and drugs, and strengthening consumer demand and international mobility.
“Over the medium term, we expect the global economy will work to solve the problems that emerged in 2021,” Marko Kolanovic, JP Morgan’s chief global markets strategist, said in a report. “As the pandemic fades, consumers should redirect spending from goods and toward services.”
Meanwhile, the bank added that “supply-chain bottlenecks will alleviate and that globalization will keep the price of goods in check, as it has for the past two decades.”
Ultimately, based on various research notes and economists’ commentary, the success or failure of 2022 might hinge on the Omicron variant.