Final readings of 2021 will likely confirm this was the strongest year of economic growth in the U.S. in decades, but it didn’t always feel like an outstanding year.
The path of COVID-19 was especially challenging. Optimism reigned in the first half of 2021 as economic restrictions lifted, but then the Delta variant arrived. Vaccination started briskly, but is now proceeding slowly, leaving the nation at some risk of renewed outbreaks.
Leaders in the U.S. can reflect proudly on their decisive policy responses to the pandemic, starting with the CARES Act in March 2020 and continuing through the American Rescue Plan a year later. Support programs for consumers and businesses went beyond any precedent. The outcomes were clear: Most households exited the recession in a stronger position, with more savings and less debt than they had before the crisis. It wasn’t easy, but most businesses survived the pandemic; some adopted new practices and technologies that made them more resilient.
Those supports positioned the economy for a prolonged interval of elevated consumer spending. Most people maintained their incomes but could not spend in their usual patterns, setting the stage for elevated goods purchases. Supply links have been overwhelmed, and inflation has taken root as more dollars chase limited supplies. We expect inflation will dissipate in the year ahead, but not without elevated concerns about its effect on real incomes.
"Progress in the American labor market will be closely watched in 2022."
The year ahead will see fiscal policy shift from emergency measures to long-term investment. Pandemic support programs have expired, and attention has turned to infrastructure and social spending proposals. Infrastructure investment has found bipartisan support, and its approval will help the transition into less generous but steadier government spending. Ideas for social supports were vast, but only a small subset of programs are likely to be approved. The Democratic party is eager to show some legislative gains in advance of a midterm election next year.
The most pressing need for the U.S. economy will be a more complete return to work. The improvement in the unemployment rate masks a substantial reduction in the workforce. Despite elevated job openings, millions of workers have not returned to employment, for a variety of reasons. Some of these workers enjoyed expanded unemployment benefits, but that program has ceased; any savings cushion will dissipate in due course. Early retirements may not prove permanent, and the availability of childcare is improving.
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More consumers returning to work will support steady economic growth. And those workers who took the pandemic as an opportunity to retrain into higher-value work will reenter with greater skills, a benefit to the broader economy.
Worries about trade in the U.S. predate the virus, and the return of trade tensions is another sign of a return to normal. The Biden administration has maintained a tough line on China; the business community has diversified suppliers away from China where possible, but re-shoring remains more of a buzzword than a tangible outcome thus far.
Further investments in technology will be needed to support productivity gains. Employers have struggled to hire, especially for lower-wage workers. From warehouses to restaurants, evidence of automation is growing. Adoption of e-commerce has expanded during the pandemic, and may bring additional discipline to pricing as it proceeds.
The year ahead should bring the U.S. closer to a state of normalcy. Inflation will return below 3% by the end of the year, while gross domestic product (GDP) is forecast to grow by over 3% in the full year 2022. Both of those are higher than their long-run averages, but a step down from the frenetic pace of 2021. Employment will continue growing, prompting the Fed to raise rates from the zero lower bound. After two years of ups and downs, a steadier year will be welcome.
