Prediction: Threats of recovery in the oven before Putin turns up the heat

The U.S. market is close to full employment again, but high oil and gas prices, rising inflation, labor shortages and a faulty supply chain are threatening economic recovery – and that was before Russia invaded Ukraine, according to the latest US forecast from UCF’s Institute for Economic Forecasts.

“The diaper cake of economic problems we are currently facing was baked via COVID-19 policies…Vladimir Putin just put the icing on the cake.”

–Sean Snaith, Director, Institute for Economic Forecasting

“The layer cake of economic problems we are currently facing has been baked via COVID-19 policies,” says Sean Snaith, national economist and director of the Institute for Economic Forecasting, in the 2022 Winter US Forecast. “Vladimir Putin just put the icing on the cake. High oil and gasoline prices are linked to COVID-19 policies that have lowered demand during shutdowns and led to lower production. The invasion of Ukraine by Russia only served to accelerate price increases that had been underway for a long time.

Prior to the start of the war in Ukraine, consumer price inflation was approaching 8%, fewer people were returning to work, and consumers faced product shortages, manufacturing delays, and rising prices. Snaith says the war, ensuing sanctions and rising uncertainty will impact global trade, but since Russia is a minor trading partner of the United States, the direct effects of any trade restrictions will be relatively weak.

During the COVID-19-induced recession, the Federal Reserve cut interest rates to near zero and the Fed’s balance sheet grew to $8.9 trillion. Snaith says the Fed needs to quickly shift into inflation-fighting mode and that quick interest rate hikes are expected. The US economy, as measured by real gross domestic product, was -3.4% in 2020 but accelerated to 5.7% in 2021. It is expected to slow to 3.5% in 2022 and 2.7% in 2023 and 2024 before dropping to 2.5% in 2025. Risks to this outlook continue to mount, warns Snaith.

“American consumers have provided the muscle that fueled the recovery, but high gasoline prices and headline inflation are eroding their purchasing power and weakening this important economic engine,” Snaith said.

Real consumer spending accelerated to 7.9% in 2021 but will decline to 3% in 2022, then to 2.7% in 2023 before stabilizing at 3% in 2024 and 2025.

Growth in salaried employment was 2.8% in 2021, and it will be followed by 3.6% in 2022, 1.5% in 2023, 0.8% in 2024 and 0.6% in 2025, according to forecast. Public health shutdowns have crippled the best labor market for decades, Snaith says, and it won’t be until the third quarter of 2022 that total corporate payrolls will return to pre-pandemic levels. Furthermore, overall unemployment is expected to decline to 3.6% in 2023 before starting to rise.

The housing market remains tight with extremely low inventory and still low mortgage rates supporting the sector. Housing starts fell from 1.4 million in 2020 to 1.6 million in 2021, but are expected to slow to 1.31 million by 2025.

The Institute for Economic Forecasting strives to provide comprehensive, accurate, and timely national, state, and regional economic forecasts and analysis.

Snaith is a national expert in economics, forecasting, market sizing, and economic analysis who writes quarterly reports on the state of the economy. Bloomberg News named Snaith as one of the nation’s most accurate forecasters for his predictions on the Federal Reserve’s benchmark interest rate, the federal funds rate.

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