‘Too much growth, too much inflation, too little Fed’

What will your personal financial picture look like in 2022? Why is the economy growing so fast? What will happen with inflation in the new year? And what role, if any, will COVID continue to play in it all? 

 

According to Daniel Island resident Steve Slifer, owner of NumberNomics, there are far too many questions and not enough answers. But the economist, author, and speaker did his best to break it all down and offer up his predictions for 2022 at his popular annual

Economic Outlook Conference on Dec. 1. The program, held virtually via Zoom, summarized where we’ve been economically over the last couple of years — and where we’re headed.

 

“This coming year is going to be every bit as challenging as what we’ve just been through,” noted Slifer, who served as the chief U.S. economist for Lehman Brothers in New York City from 1980 until his retirement in 2003. “We’ve got inflation to worry about, we’ve got to worry about the Fed, and now we’ve got all of these bills working their way through Congress. So unfortunately the job for all of us doesn’t get any easier.”

 

Slifer began his presentation with a look at the demand side of the economy — which he said is “super strong” due largely to the surge in government stimulus cash infused into the market, beginning in 2020 and continuing in 2021.  

 

“Demand far exceeds supply, so GDP growth this year and on into 2023 will remain pretty strong,” Slifer added. 

 

In comparison, Slifer noted that in the March 2020 lockdown, initiated by then President Donald Trump in response to the COVID-19 pandemic, the GDP experienced a 30% drop — which equates to about a $2.2 trillion shortfall. The first stimulus bill, a $2.5 trillion package, passed that same month, helped “plug the hole,” added Slifer. That cash and other significant stimulus measures in the months that followed did get things moving in the right direction. Although Slifer believes the total surge amount of $9.5 trillion was a bit

“overkill,” it did prompt the economy to come “roaring back,” he said. Even the stock market, which took five years to rebound after the recession of 2008-09, reversed course in a matter of months. 

 

“What we have this go round is absolutely unprecedented,” he said. “The run up on the stock market didn’t just happen ... it’s not statistical stuff. Corporate earnings have been flowing right in and they’re now at a record level.”

 

We’ve also seen our net worth rise by about 20% in the last year, continued Slifer, and at least part of it is due to the stock market gains. But housing prices have also played a role, he said. After a big drop in home sales in 2020, the market is experiencing a “huge rebound.”

 

“The average home today sells in 18 days!” he added. “That is the shortest time between listing and sale that we have ever seen. So demand for housing is just very, very high. And because we have all been buying these homes right and left, Realtors don’t have a lot of inventory to sell.”

 

Home prices are up about 20% just in the last year, Slifer noted. He sees those prices continuing to climb in 2022, but slowing to about 8%.

 

“They’ll slow down a bit as presumably more supply (enters the market),” he said. “The point should be that home prices are going up, mortgage rates are going up, so affordability has dropped a little bit.”

 

Slifer sees builders being able to pick up the pace of construction as supply bottlenecks loosen. Orders continue to flow into the production sector, he added, with inventories remaining low. But Slifer is confident things will be on the upswing soon.

 

“Once these supply constraints begin to dissipate, which will hopefully happen, next year we’re gonna get a tailwind.”

 

Another factor influencing the market is the number of people who are unemployed. According to Slifer, employment numbers are still about 4.2 million below the pre-pandemic level. But this figure is based on “payroll employment,” he said, which doesn’t include self-employed people. 

 

“Could it be that a lot of those folks that aren’t on the payrolls today kind of ventured off on their own and have started their own businesses?” he asked. 

 

So while job openings are “off the charts,” there may be an explanation for why at least some of those positions are not getting filled, continued Slifer. “Maybe a couple million of them have become self-employed, a million others look like they’ve retired ... and there’s another group that is exploring their options ... My guess is a lot of these folks are going to be back on the job fairly soon.”

 

As for COVID-19 impacts, Slifer is confident the situation is much better than when the pandemic started, pointing out that some 233 million people in the U.S. have received at least one vaccination. 

 

“I don’t think we’re going back to widespread lockdowns,” he said. “Maybe we’ll have some isolated cases ... It is something that should be watched, but my expectation is that this is not going to be a big issue going forward.”

 

One of the key factors that will continue to impact the economy is inflation, stated Slifer. Referencing the work of late economist and Nobel Memorial Prize winner Milton Friedman, he noted that inflation is always a function of growth and the money supply. 

 

“Let money growth get out of hand and you’re gonna have a problem with inflation,” he said. “... Excess money, liquidity slopping around out there just waiting to get spent, I personally find that just a bit scary. I don’t think the inflation rate is coming down anytime soon.”

 

Slifer did point to other bright spots in the economy — such as the tremendous impact of technology during the pandemic. He cited the success of Operation Warp Speed in getting vaccines developed in record time, the ability of people to adapt to working from home

with video conferencing and more efficient broadband offerings, the rise in the use of telemedicine, online retail sales with curbside pick-ups, enhanced data security, and the increased use of food delivery services like Uber Eats and Grub Hub. 

 

“With that increase in productivity, corporate profits have taken off!” he said.

 

But that comes with a price. 

 

“With the economy growing rapidly, kind of at full employment, it’s gonna lead to a situation where inflation doesn’t drop,” added Slifer. “The Fed will raise rates, but pretty slowly. That’s a great scenario for stock prices. But leaves us back where we started at the beginning – too much growth, too much inflation, and too little Fed.”