view original post

By Manfred W. Keil and Robert A. Kleinhenz | Inland Empire Economic Partnership

Now that we made it through 2021, let’s look ahead to 2022. Economic predictions tend to be  either based on econometric forecast models or on so-called leading economic indicators. These are variables that have more-or-less reliably predicted business cycle turns in the past, for example, widely-watched indicators such as the stock market or housing starts. Similar to a medical doctor who bases your health outlook on vital signs such as your temperature, blood pressure, and pulse, we will base our outlook for 2022 on the vital signs of  the nation, the state, and the Inland Empire region.

All current forecasts depend on the path the coronavirus will take in 2022. This is similar to where we stood in January 2021, when the Pfizer-BioNTech and Moderna vaccines became widely available, providing a much needed dose of hope for economic recovery. Despite the current setbacks due to the omicron variant, we will assume for our forecast that the pandemic will impede but not derail economic activity, with some sectors lagging the overall pace of growth. Moreover, we assume a new booster shot to be available by late spring 2022.

Let’s start with the most recently available economic headline news item, the unemployment rate or employment in general. The national unemployment rate for December stood at 3.9%, down from 4.2% in November and 6.7%  a year earlier, having declined from a post-World War II high of 14.8% in April 2020. Aided by the stimulus dollars and an extremely loose monetary policy by the Fed, the health of the national economy improved significantly judging by the unemployment rate numbers. We are only 0.4 percentage points away from the end-of-expansion unemployment rate of 3.5%.

While this impressive turn of events is welcome, the headline unemployment rate does not necessarily reflect significant underlying movements in the labor force and employment. We still have 2.9 million employed workers in the economy compared to February 2020, and 2.3 million people are “missing” from the labor force, partly due to elevated quit rates that have been characterized as “The Great Resignation,” and partly due to demographics, specifically exits by members of the Boomer age cohort, who are at or near retirement age, that exceed entries of the numerically smaller Gen-Z age cohort. As a result, we expect the unemployment rate to remain tight this year in the range of 4%, while nonfarm employment levels will finally surpass pre-pandemic levels sometime in the second half of 2022.

The expansionary policies of the Federal Government and the Federal Reserve both resulted in a surge in demand for goods and services over the last several quarters. Coupling this with the supply chain constraints, inflation took off, reaching 7%, a four-decade high, by the latest measure. The Federal Reserve will raise interest rates earlier than previously assumed, and do so three times this year. It will also cut back on their bond purchases. Given these dynamics, we believe that inflation will average about 4.2% for 2022, with the Fed’s 2% target coming into view by this time next year.

Output or Gross Domestic Product growth was very solid for the year, although the fourth quarter numbers for 2021 will not be available until the end of January. We expect a historically relatively high growth rate of 6.4% in the last quarter of 2021, which is slightly more optimistic than the “Blue Chip Consensus” forecast of 6%. It is also in line with the strong GDP growth rates for the first two quarters of the year. Our fourth quarter forecast would result in an annual 2021 growth rate of 5.4%, the fastest since the early 1980s. For 2022, we expect a similar, although slightly lower growth rate of 4.5%, which is still high by the long-term historical average of 3%. It is in 2023 that we expect to return to just below the long-term average.

Throughout the present recovery, the Inland Empire has found itself in an unusual role: Its recovery has proceeded more quickly than that of its coastal neighbors. For example, the Inland Empire is just 2.4% shy of its pre-pandemic nonfarm job peak, based on seasonally adjusted numbers for the month of November, well ahead of Los Angeles County (6.6% shortfall) and Orange County (4.9%). And as of November, the region’s labor force was 1.1% above the pre-pandemic high, suggesting little evidence of discouraged workers in the Inland Empire.

On top of that, household employment, a figure that includes all workers (payroll employees, self-employed and others) who live in the region regardless of where they work, is just 11,000 workers short of its pre-pandemic peak. One of the reasons is the success of the logistics sector in the current expansion. Increased domestic retail orders and imports have resulted in more employment in warehousing, transportation, and wholesale trade. In turn, the region’s unemployment rate has come down quickly. With household employment gains outpacing labor force growth by a 2-to-1 margin, the unemployment rate fell to 5.4% in November 2021 from 7.8% a year earlier.

Barring significant increases in the labor force, the region will face a tightening labor market in 2022. This will increase worker incomes as well as the region’s inflationary pressures in the months ahead. Nevertheless, the Inland Empire will continue to be an affordable place for business when compared with coastal neighbors and many other regions of the nation.

Manfred W. Keil: Chief Economist, Inland Empire Economic Partnership, Director, Lowe Institute of Political Economy, Robert Day School of Economics and Finance, Claremont McKenna College. Robert A. Kleinhenz: CEO Kleinhenz Economics, Inland Empire Economic Council, California State University Long Beach.

The Inland Empire Economic Partnership’s mission is to help create a regional voice for business and quality of life in Riverside and San Bernardino counties. Its membership includes organizations in the private and public sector.