In Focus
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Forecasting the Year Ahead
Former Lehman Brother economist Stephen Slifer recaps his forecast for 2022, discussing liquidity after the government oversold the recovery and the ongoing impact of tech in helping us adapt beyond a pandemic
T
he coming year is likely to be characterized by surprisingly robust GDP growth at 4.9%, and inflation is almost certain to remain far higher than the Fed would like to see at 4.8%. Because the Fed continues to believe that the recent run-up in inflation is caused by supply chain disruptions and not by excessive growth in the money supply, it still concludes that the flare-up in inflation is “temporary.” As a result, it is inconceivable that it will choose to aggressively fight inflation any time soon. It may well raise rates three Slifer times in 2022, which would boost the funds rate from near 0% today to 0.75% by the end of 2022, but it
would still be far below its “neutral” level of 2.5%. Fed policy will remain stimulative for years to come. The combination of robust GDP growth next year, a substantial increase in inflation, and still low rates will keep corporate earnings on a roll and the stock market soaring.
Economy continues to roll
The recession in March and April of 2020 was caused by federal government action. It chose to fight COVID by shutting down the U.S. economy. As a result, GDP growth in the second quarter plunged by 31% and fell $2.2 trillion below its potential growth path. Twenty-two million Americans lost their jobs. Given that government action was the cause of the recession, our leaders in Washington felt an obligation to make people whole. But they overdid it. The
combination of $5.3 trillion of stimulus checks and $4.2 trillion of Fed purchases of securities have provided $9.5 trillion of stimulus to counter a $2.2 trillion shortfall. No wonder the economy has been on a roll, and because much of that excess liquidity remains, we are bullish on the 2022 outlook and anticipate GDP growth of 4.9%.
Tech helps us adapt
In addition to excessive stimulus, the tech sector played a pivotal role in lifting the economy out of recession, and we believe that economists have underestimated its importance. Think of the bio-tech sector and the development of the COVID vaccine. Vaccine development is typically a 10-year process but the COVID vaccine was developed in a single year thanks to technology.
When the economy was shut down a firm could not meet face-to-face with its employees. Sales people could not meet face-to-face with their clients. But along comes Zoom and Microsoft Teams to allow them to approximate face-to-face meetings when they could not otherwise do so. During the pandemic, consumers could not go to local stores to shop. They had to buy things online. Amazon was well positioned to do that but, with the help of technology, brick-and-mortar stores like Walmart and Target did a wonderful job of educating their customers to order online and pick up their merchandise at the store. Many people were sick. No one wanted to sit in a doctor’s office among a bunch of See YEAR HEAD, Page 14
