From COVID to the Fed, here’s what can go right or wrong in 2022 for the economy

Welcome to 2022, where prices are soaring, equity markets are roaring, quitting jobs is alluring, and the Fed has stopped snoring. And if that were not enough, omicron cases are booming, and total government dysfunction is looming.

This is the environment in which businesses, households, and investors must make plans. About the only way to do that is to weigh the risks and opportunities for growth, and decide how your plans fit in.

» READ MORE: 7 ways to protect your small business from inflation

Here are some thoughts about the key factors.

Let’s start with the 800-pound gorilla: COVID-19. What happens with the virus is the overarching issue facing the economy.

Currently, we are worried about omicron. This rapidly transmitted but seemingly less deadly strain could be the variant that takes us out of the pandemic and into the endemic phase, or is the one that spawns the next destructive virus outbreak.

If, as hoped, omicron dominates and is less deadly so the world can learn to live with it, the economy should be able to sustain solid growth. The problems with the global supply chain can be fixed, over time, without further dislocations. Whatever will be the “next normal” could be ushered in this year.

Unfortunately, even with a less deadly virus circulating the globe, issues could emerge. In countries where vaccinations are widespread and milder cases of COVID are dominating, the “herd immunity” being developed could allow for a return to offices, schools, and social activities. COVID might be with us, but it will not be debilitating.

However, in countries whose populations are not broadly vaccinated, and/or where the vaccines are less effective, the risks would still be great. Many under-developed and developing nations fall into that category. Some have become key suppliers of goods for the world.

There is also China, whose vaccine effectiveness is waning. Continued periodic outbreaks followed by shutdowns in strategic nations could limit the ability to untangle the global supply chain, restraining world growth.

Implications: Expect the supply chain problems to ease, but not disappear this year.

While COVID has been a major factor creating soaring production costs and the rebirth of corporate pricing power, it hasn’t been the only reason. The massive federal stimulus programs, which have totaled more than $5 trillion, not only dragged us out of the deep recession, but also funded a recovery that was breathtaking in its speed and magnitude.

Whether you worked or didn’t work, ran a business that operated or closed, whether you, your business, or your state or local government needed it or not, the federal government sent you a check. Most economic units in this country benefited directly from the stimulus programs, while the rest profited indirectly by having the economy recover extraordinarily rapidly.

But no good deed goes unpunished, and the decision to continue some of the programs is now a prisoner of our dysfunctional government. Even necessary programs, especially ones that have supported poorer families and children, are being held hostage to the practice of not supporting anything that is proposed by the opposing party.

Does the economy require another stimulus bill? Only if you want strong growth.

Currently, it appears that no major new stimulus bill will be passed. If one is, it will likely be modest. That has caused economists to mark down their 2022 economic growth forecasts. There may be no such thing as a free lunch, but removing the lunch causes some to starve.

Is more moderate growth bad? No. It wasn’t just tangled global supply chains that created the current high inflation. The massive influx of disposable income allowed firms and households to rapidly ramp back up spending. In a world of limited supply, businesses discovered they could raise prices with impunity. And they continue to do so.

The surge in demand also helped create a massive labor shortage, pushing up wages dramatically. It has given workers the courage to rediscover the possibilities created by job mobility, and people are quitting at historic levels. As long as demand remains strong, workers should be able to sustain their upper hand in the job market.

Unfortunately, despite wage increases not seen in decades, income adjusted for inflation has been slowly declining since last spring. Declining household purchasing power, combined with sustained business pricing power, is a worrisome combination.

Reduced government stimulus may slow growth, and by doing so ease the pressure on wages and prices. Whether that is good or bad depends upon where you happen to sit at the economic table.

Implications: Don’t expect another year of robust growth, but inflation should moderate even if the labor market remains tight.

Ah, to be an owner of houses and/or stocks. Their values have soared over the last two years.

On the one hand, this created massive wealth that raised confidence and spending. But as we saw in the dot.com and housing booms, what goes up can come down, sometimes with a thud. The bubbles may not burst, but extended periods of huge asset price gains raise serious questions about the sustainability of those increases.

Implications: Hope for the best, but plan for the worst.

Finally, there is the Fed. For more than a decade, the monetary authorities have kept rates at or near historic lows. These “emergency” rates are now viewed by many as normal rates.

With growth and inflation elevated, the Fed needs to start slowing down the merry-go-round, and it does that by raising interest rates.

On the positive side, higher rates could reduce some of the financial markets’ excesses. The bad is that higher rates, in combination with declining government assistance, could slow the economy more than expected. Regardless, the Fed must clean up the mess it created by keeping rates so low for so long.

Implications: Rates are going up, but likely not so much that they would kill the golden stock or housing market goose.

So, there you have it. The good, the bad, and the confusing factors that should determine growth this year. Good luck.

Joel L. Naroff is the president and founder of Naroff Economics, a strategic economic consulting firm in Bucks County.