The good news is that experts agree that 2022 will be in the clear from a recession for the US economy. But the next few years may tell a different story.
An economic downturn could arrive as early as 2023. Federal Reserve policy is expected to change, which will result in more business cycles that many companies will not be ready to face. Even if the country is lucky enough to dodge a recession in 2023, we can expect the economic decline to be more detrimental in 2024 or 2025. The Fed will eventually start easing up on stimulus initiatives and raising interest rates at the same time that inflation is on the rise. It usually takes the economy about a year to react to the Fed’s actions, putting us on track for a safe 2022, but with the following years feeling the impacts.
One of the most significant financial indicators of a recession is the yield curve. It shows a correlation between short- and long-term interest rates. The yield curve is usually on an upward slope when short-term rates are below long-term rates. This means there is a good amount of liquidity in financial markets.
But, when the Federal Reserve gets worried that the economy is getting too hot, it ups the Fed Funds Rate to combat inflation. You may recall how the yield curve was inverted at the end of 2019, pointing towards a recession in 2020. And the pandemic did cause an economic downturn in early 2020, but it was not typical of a cyclical recession.
Right now, the US economy is in a cyclical upswing because the Fed infused $4 trillion of stimulus into it. The Fed will keep monitoring the situation as inflation is on the rise. Customarily, increased inflation causes the Fed to raise interest rates to temper expectations. But as of now, the Fed is viewing price inflation as transitory and has not yet reacted. But it has begun to wind down its bond-buying program, with a $15 billion monthly reduction from spending $120 billion a month. Cutting down on bond purchases impacts equity markets, and when combined with higher interest rates, results in a sell-off in equities that slows economic growth.
Why 2022 Looks Optimistic
Recessions are typically a result of demand weakness, but supply issues can also be a contributing factor. Demand for goods and services is expected to be strong in 2022 because most consumers are on solid financial ground, and many businesses are also flush with cash. Combined with strong profits, the Paycheck Protection Program gave businesses nearly $800 billion while there is a rampant worker shortage. This means that more businesses are looking to invest in technology that can take the place of the workers that they simply don’t have. For example, more and more restaurants are using robots as servers to help ease the burden on their strained server staff.
There are also other factors to consider.
- Federal, state, and local governments will still be spending money since deficits are not currently an issue, and federal money is propping up the localities.
- Exports should be on the rise as global economies continue to recover.
- And new home construction will keep moving forward in 2022 even amid limitations that stem from labor shortages, buildable lots, and access to materials. But home prices are expected to begin to drop as mortgage rates rise.
Supply Chain Issues Limiting Growth
The world has certainly seen its share of supply chain issues on a global scale, thanks to shutdowns and restrictions during the first year of the COVID-19 pandemic. Many industries have been affected, but some worse than others. Even as materials become more available, their demand remains very high. For example, the automotive sector has had rampant supply problems, from semiconductor shortages to issues accessing steel and plastics. With a lack of materials to assemble and an inability to meet growing demand, plants have had to lay off workers, and growth has been limited, which is not favorable for economic circumstances. There are simply not enough materials to meet the higher demand.
What Can You Do?
As a business owner, you can look forward to 2022 being a good year that brings more gains. But you should definitely be working on contingency plans for a looming recession. As an investor, you can protect your portfolio by putting money in short-term assets linked to short-term interest rates. And you may even want to consider selling your company sooner rather than later to maximize your profits in a transaction while the economy is strong, investors are still spending, and your valuation will be powerful in what remains a seller’s market.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
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