It’s been a disappointing fall. The Covid Delta variant has fenced in a restless public, while the economy is still woozy from rapid shifts in spending patterns and kinks in supply lines. Back to normal, we are not.
But consumers are way gloomier than they should be. Consumer confidence is at the lowest level in years, and by some measures nearly as bad as the early days of the Covid pandemic in April and May of 2020. A recent CNBC poll found that 47% of respondents think the economy is headed for a recession, with just 34% feeling it’s not. This grumpiness may explain why voters thumped Democratic candidates in the recent Virginia and New Jersey governor races, voting down the performance so far of President Biden and his fellow Democrats in Congress.
Shoppers are clearly worried about inflation, with overall prices up 5.4% during the past year. Gas prices are up 42%. Home prices are up 14%, locking out many buyers. Prices are rising faster than wages, overall. Shortages of products such as cars and electronics is contributing to inflation and putting some goods out of reach. It may also remind people of the panic buying and empty shelves that signaled deep trouble after Covid exploded in the spring of 2020.
Those are real problems affecting family budgets. But the outlook is a lot better than many seem to believe. Here’s a breakdown:
Inflation. Price hikes are real. The question is whether they’re permanent, more or less, or a one-time phenomenon caused by pandemic disruptions. At least some inflation is almost certainly temporary. Huge spikes in the price of cars, electronics and other goods are largely due to the seminconductor shortage. That won’t end soon, but it will end, and prices will moderate when they do. Traffic jams at ports are another reason for shortages and price hikes, and those, too, will unwind eventually, as demand slows after the holidays and consumers start spending more on services (and less on goods). A year from now, it’s quite possible there will be deflation—falling prices—in some things that are getting costlier now.
Oil and gas prices are a wild card. The shift to clean energy will cut demand for fossil fuels, but the same dynamic will depress investment in drilling, since returns could decline in coming years. So demand and supply will probably both decline over time, and if one outpaces the other, prices will rise or fall accordingly. Home prices will probably moderate whenever interest rates go up, but that might not be a year or two and meanwhile there’s certainly no excess of supply. On the whole, some things will remain expensive, but there are good reasons to think inflation six or nine months from now will be better, not worse.
The Federal Reserve will begin dialing back the extraordinary economic aid it's provided since the pandemic erupted last year, a response to high inflation that now looks likely to persist longer than it did just a few months ago. (AP Photo/Richard Drew) ·ASSOCIATED PRESS
Covid. The Delta surge clearly spoiled many Americans’ plans for a return to normal, but Delta is now receding while the vaccination rate continues to creep up. Two new developments could really end the pandemic in 2022: The availability of vaccines for kids as young as 5, and President Biden’s newly announced Jan. 4 deadline for many employers to require workers to get vaccinated. The usual battles will ensue, but vaccination rates will still go up, and as the weather warms next spring, a real return-to-normal might be imminent.
Jobs. Employers created a robust 531,000 new jobs in October, and the unemployment rate fell. There are still a near-record 10.4 million jobs open across the country, with businesses continuing to raise pay and offer other perks to entice workers. There’s almost no chance a recession could be looming if the job market is this hot. Some factors keeping people out of the labor force should improve. The employer vaccine mandate will ease concerns some people still have about contracting Covid at work. The normalization of school schedules should gradually free more parents to start working. And as Covid disruptions ease, fewer people will worry about it.
Pent-up demand. Americans’ total net worth has soared by $31 trillion since before the pandemic, as savings rates skyrocketed, stock and home values surged and federal stimulus payments materialized in bank accounts. Household debt as a percentage of income is close to record lows. Consumers have money and they’re eager to spend. Car sales, for instance, are close to recession levels simply because automakers can’t build enough vehicles. As the chip shortage eases and more cars roll off the line, a buying boom seems inevitable. The same goes for most other sectors crimped by pandemic disruptions.
A trucker loads his truck with fuel at the Marathon Oil Refinery in Salt Lake City, Utah on October 29, 2021. (Photo by GEORGE FREY/AFP via Getty Images) ·GEORGE FREY via Getty Images
There’s always something that could go wrong—as the Delta variant proved this summer and fall. A more powerful Covid variant less susceptible to vaccines could emerge. The Federal Reserve, which helms the economy, could screw up. Inflated asset prices—namely, stocks—could turn south. But a lot has already gone wrong, since Covid arrived, and stress tests have already revealed vulnerabilities in supply lines and other weak links in the global economy. How much worse could it get?
President Biden is in the cellar now, with inflation, political gridlock and other factors pushing his approval rating well below 50%. Biden’s Democratic Party looks like an unmanageable herd of cats that can’t establish a functional majority in Congress, even with numerical control of both houses. Voter disgust in 2021 reflects a stalled and confusing Biden agenda, and voters could send a lot more Democrats packing in the 2022 midterm elections.
But the economy probably won’t be the reason. A lot of momentum is lining up that could make 2022 the breakout year 2021 was supposed to be, but wasn’t. Eventually, it will be safe to believe it.
