This article was originally published in the Richmond Times Dispatch on January 9, 2022.
Forecasts are based on assumptions. And the forecast for this year has assumptions and questions built into it.
For instance, how fast will the Federal Reserve raise the federal funds rate target which is the overnight interest rate that banks charge each other? Will inflation remain high throughout the year and push up longer-term interest rates such as the 30-year mortgage rate? Will the price of oil remain above $70 a barrel?
Overall, we expect gross domestic product to grow to 4.0% in 2022 - a much slower rate than last year. The GDP for 2021 is expected to have grown 5.6% if last year's 2021 fourth quarter comes in at the 6.1% annualized pace we are forecasting.
The infrastructure plan passed in November should provide some boost to economic growth this year.
Similar to last year, expected trends in the spread of COVID-19 are playing a role in economic forecasts.
Perhaps the biggest change in 2022 relative to the last two years is the reduction in stimulus that boosted consumer spending in 2020 and 2021. This is a dynamic that shouldn’t be underestimated.
From the first stimulus package in March 2020 to the third stimulus in March 2021, households received $850 billion in direct payments from the federal government. To put that into perspective, a family with two adults and two children would have received $11,400 if their income was less than the level set by the law to receive the payments.
Consumers’ savings skyrocketed as a result. In the second quarter of 2020, consumer savings jumped to $4.8 trillion according to the Bureau of Economic Analysis. That was up from $1.2 trillion in the fourth quarter of 2019 before the pandemic started. The latest data for the third quarter of 2021 show savings at $1.7 trillion.
Monetary policy also has acted as a stimulus.
In addition to purchasing bonds, the Federal Reserve has kept the federal funds rate target at essentially zero since March 2020.
As a result, long-term interest rates have also remained low. A 30-year mortgage rate that has hovered around 3% has bolstered the housing market.
But the stimulus is expected to dry up in 2022.
President Joe Biden’s Build Back Better domestic economic plan did not pass before Congress adjourned in December and it may not receive approval in 2022.
The Federal Reserve has indicated it will stop its bond buying program in March and most analysts expect the Fed to raise the federal funds rate target three times this year which would put it at 0.75% by year end.
In addition to losing stimulus, the economy is facing the headwinds of supply chain and labor shortages that have contributed to an acceleration in inflation.
Consumers likely won’t be spending at the 8.1% annualized growth rate we saw in 2021 (fourth quarter data will be released on Jan. 27) because higher gas and food prices will be taking a chunk out of their wallets.
Instead, we expect growth in consumer spending to slow to 3.9% in 2022 — still a healthy pace for consumers that make up about 70% of GDP.
U.S. employment, on the other hand, is forecast to grow a faster 3.8% in 2022 compared with 2.7% in 2021. This assumes the omicron variant causes mild infection and peaks in the nation by the end of January, which allows more businesses to operate closer to pre-pandemic capacity.
Employment grew an estimated 1.6% in Virginia during 2021 (December employment will be released Jan. 25) and we expect it to grow 3.0% in 2022. Employment in the Richmond metro area was estimated to be unchanged in 2021 and is forecast to grow 3.4% in 2022.