Economic Outlook Symposium: 2021 Performance and 2022 Outlook
The Chicago Fed hosted its 35th annual Economic Outlook Symposium (EOS) on December 3, 2021. Distinguished economists and industry specialists reported on economic and sectoral performance in 2021, provided projections for 2022, and discussed key policy issues. This blog post provides highlights of those presentations and discussions.
Discussion of the economy and consensus outlook
Anna Paulson, Chicago Fed executive vice president and director of research, opened the program by saying that we are close to entering our third year of the pandemic impacting our economy. Rising Covid-19 cases over the summer exacerbated supply chain disruptions and restrained previously rapid growth in household and business spending in the third quarter, she said.
On a positive note, Paulson said that economic activity has picked up in recent months. This can be seen in the labor market data, she noted, with the unemployment rate in November at 4.2%. Also, labor force participation increased in November to 61.8%, although this represents only a partial recovery as compared with when the pandemic started.
We continue to experience inflationary pressures, Paulson stated, because supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Higher energy prices and rents are also putting upward pressure on inflation, and there are signs that inflation trends are picking up more broadly, she added. “There is uncertainty as to when inflation pressures will abate,” she noted, and as a result, “monetary policy will need to adapt to reflect the changing data.”
Paulson warned that the recent rise in Covid cases and the emergence of the Omicron variant are a sharp reminder that we remain in the grips of the pandemic and must be humble in our assessments. As for the future, she and her colleagues will be watching the incoming data closely to determine the extent to which the pandemic is causing shorter-term changes as compared with longer-term structural adjustments (for example, in terms of workforce participation, capital investment, and wage and price-setting psychology).
Thomas Walstrum, Chicago Fed senior business economist, reported on the consensus outlook, which is based on inputs from numerous forecasters and is published annually. (Walstrum also looked back at last year’s submitted forecasts and determined that actual real gross domestic product (GDP) and inflation were both higher than anyone predicted for 2021.) Overall, the submitted forecasts predict a strong 2022, Walstrum noted; for instance, the median projection for real GDP growth is 3.7% between 2021:Q4 and 2022:Q4.
The submitted median forecast for the unemployment rate is 3.9% for 2022:Q4, Walstrum said. Based on this forecast, as well as a similar projection for 2022 from the Fed’s Federal Open Market Committee (FOMC) in September (the FOMC’s December projections for the unemployment rate and other key economic variables were released after the EOS took place), Walstrum noted that the November 2021 unemployment rate of 4.2% is only modestly above these predictions.
Walstrum reported that the submitted median forecast for Consumer Price Index (CPI) inflation is 3.1% for 2022:Q4 over 2021:Q4—which is lower than the median expected rate of 6.1% for 2021:Q4 over 2020:Q4. He suggested that this predicted decline is driven by an anticipated reduction in wage pressures, as well as an easing of supply chain constraints, including those faced by the hard-hit auto industry.
Panelists’ perspectives on the economy
Thomas Klier, Chicago Fed senior economist, moderated a panel of four guests representing different perspectives on the economy. Panelist Karin Kimbrough, chief economist at LinkedIn, shared insights on the labor market from the perspective of the LinkedIn platform. She noted that while the labor market remains tight, November was a very strong month for hiring, up 7% from October, which was fairly broad-based across industries.
Kimbrough explained that “there seems to be a real aggressive preference for remote work.” Before the pandemic, one in every 67 jobs was remote on the LinkedIn platform versus one in seven today, she said, adding that “it seems as if remote is starting to entrench itself into the fabric of our world of work.” Drawing from a LinkedIn survey of 350,000 members, 81% of employees in the U.S. prefer remote work, she shared.
Recently, women have started coming back to the labor market in larger numbers following a large decline earlier in the pandemic, Kimbrough said. Women have a particularly strong preference for remote work as well as entrepreneurial work, she reported.
Recent hiring has been robust among millennials and Generation X but less so among baby boomers, Kimbrough said, suggesting that baby boomers may have accelerated their retirements based on Covid-19 concerns and likely benefited from housing and stock market gains over the past few years. Optimistic about the future labor market, Kimbrough stated, “I think people will come back when they’re lured back for the right reasons and the right price or wage.”
An associate professor at Georgetown University’s McCourt School of Public Policy, Bradley Hardy, whose work focuses on low-income families, said that the social safety net was quite effective during the pandemic. Poverty reduction was substantial thanks to economic assistance payments, food stamps, emergency unemployment insurance programs, and income support through the tax system (notably, the child tax credit).
While there are families that are still hurting because of the pandemic, the U.S. Census Bureau’s Supplemental Poverty Measure shows a 2.6 percentage point decline in the poverty rate in 2020 from 2019, Hardy reported. At the same time, evidence from the Atlanta Fed, in particular from its Wage Growth Tracker, shows that nominal wages are rising substantially for the bottom 20% of the wage distribution, which is undoubtedly helping to offset the negative effect of rising inflation for low-income families, he added.
Hardy recommended reinvesting in state human resource agencies to “make sure that we can efficiently deliver benefits to families that are suffering.” He said he hopes the child tax credit will become a permanent tax allowance for families in the U.S. He stressed that the child tax credit, which has been used in many Organisation for Economic Co-operation and Development (OECD) countries, is a very effective way to deliver assistance.
Svenja Gudell, chief economist at Zillow, reported that home values are up 18% nationally as of September 2021 over the previous year (compared with a historical annual growth rate of about 3.5%). She said that high demand relative to the supply of homes is driving up home prices. At the same time, mortgage rates have remained low—at the time of the EOS, right around 3% for a 30-year fixed mortgage—which “has certainly kept affordability in check, even though home values have risen dramatically over the last few years,” she said.
Gudell noted that she is starting to see some tapering off in housing prices, with inventory levels bottoming out. However, she also said, “I’d argue that we do not have enough units right now to actually meet demand.” The fact is that lumber, steel, and labor supply constraints are still impacting new home construction, she explained.
Gudell said that rental affordability has been an issue for some time and continues to be a concern, reporting that rents are up 13% in September 2021 from the same month of the previous year (compared with a historical annual growth rate of between 2.5% and 3.5%). With regard to whether the changes in the housing market will persist, she shared that she’s not yet convinced that anything will permanently change.
Chad Moutray, chief economist at the National Association of Manufacturers (NAM), reported that demand in the manufacturing sector continues to be strong, based on the timely data collected from NAM's Manufacturers’ Outlook Survey. Drawing upon the results from the November survey of the Institute for Supply Management (ISM), he also said he sees very positive signs in terms of manufacturing production, employment, and factory orders.
The number one challenge in the manufacturing sector, Moutray said, is the higher cost of raw materials, but the sector is also facing issues related to labor shortages (especially for entry-level workers despite significant increases in their salaries in 2021), supply chain issues (including a semiconductor chip shortage, although that has subsided somewhat), and higher freight costs (especially for small- and medium-sized businesses). Manufacturing production is up 1.2% from when the pandemic started, “so we have bounced back pretty nicely from that,” he said. Moutray said he expects growth in the manufacturing sector to continue into 2022.
On the supply chain issue, Moutray suggested that “we’ll see a lot more production return to the U.S., and at least North America, especially in light of these increasingly large freight costs.” He also noted that “companies in general are looking at making sure that they have more than one supplier.”
Summary remarks from the keynote speaker
Diane Swonk, chief economist at Grant Thornton, said that, in general, pandemics tend to lead to labor shortages and thus push wages up, but they don’t usually lead to inflation as we have seen with the Covid-19 experience. This time, technology helped to prop up demand by supporting the continuation of work despite lockdowns and hesitance to return to work for fear of exposure to the virus. The unprecedented assistance by government also helped to support demand in ways not seen in earlier pandemics. Both factors contributed to inflationary pressures, she acknowledged.
“The labor markets are beginning to heal,” Swonk said, with the labor force participation rate at its highest level since the pandemic started. Going forward, consistent childcare options and school schedules are necessary to get more people back into the workforce, she said.
According to the ISM service index published in early December 2021, Swonk observed, the travel and tourism sectors achieved their highest levels since 2019 as people returned to restaurants, hotels, theaters, and sporting events in greater numbers. Swonk said she predicts the U.S. economy would grow by 5.7% in 2021, although she anticipates that the nation’s growth rate will slow to about 4.3% in 2022.
Average inflation for the year as measured by the CPI will be about 4.5% in 2021, Swonk said, and she expects inflation to slow to about 3.5% in 2022.1 Despite some easing, inflation will continue to be of concern to the Federal Reserve next year, which she said will likely translate into policy-driven interest rate hikes in 2022.
Consumer spending should continue to be strong in 2022, but not as robust as in 2021, Swonk noted. Spending on services should pick up more than goods purchases, which were relatively strong during the height of the pandemic, she added.
On the business side, “we’re seeing the strongest investments in technology and intellectual property that we’ve seen since World War II,” Swonk stated. Inventories are currently at extremely low levels, she said, and “we’ll spend much of 2022 replenishing those inventories, so store shelves will be full again and dealer lots will have cars on them again.”
Fiscal stimulus from the government in response to the pandemic will continue to abate next year, with the private sector needing to pick up some of the slack in spending, Swonk said. In addition, government spending associated with the infrastructure bill that has passed Congress will not fully show its effects until the mid-2020s, she noted.
In closing, Leslie McGranahan, Chicago Fed vice president and director of regional research, gave her appreciation to the EOS’s panelists and keynote speaker for their insights on the economy, as well as to all participants that gave inputs throughout the year for the Chicago Fed’s surveys, roundtables, and public events.
1 In her presentation, Swonk provided annual average CPI inflation forecasts for 2021 and 2022—which are calculated differently from the EOS consensus outlook’s fourth-quarter-over-fourth-quarter CPI inflation forecasts. This difference largely explains why, for example, her inflation forecast for 2021 (4.5%) is much lower than the consensus outlook’s median forecast for the same year (6.1%), as presented by Thomas Walstrum earlier.