A young man dealing with standard business expenses

The U.S. economy
is showing signs of resiliency and recovery

By Sophia Kearney-Lederman, Senior Economist, FHN Financial, a division of First Horizon Bank

Whether it’s a consumer’s ability to buy a new car, a business owner’s struggle to find talented workers or a single mom’s challenges balancing work with childcare, nearly every aspect of life has been disrupted by the ongoing COVID-19 pandemic. More than two years into the health crisis, however, a sense of resiliency and recovery has emerged. Infections from the Omicron variant are fading, people are getting back to work and companies are adjusting their growth plans.

Nevertheless, for the economy in 2022, there’s still a lot of uncertainty for business owners and consumers.

How long will aftershocks of the pandemic linger to keep growth below potential? How will the war in Ukraine impact the U.S. economy? How will workplaces change? Will the tight labor market persist? How will inflation be impacted by interest rate hikes? And what about those concerning supply chain problems? Here's how these challenges will affect the U.S. economy in the year ahead.

The Pandemic and Growth Forecasts

In January, the International Monetary Fund, citing tighter Fed policy and an anticipated halt to any further stimulus spending by Congress, reduced its U.S. growth forecast for 2022 by 1.2 percentage points, to 4%, The New York Times reports. That increase would still outpace the annual average from 2010 to 2019. And most economists say activity should pick up in the spring.

The U.S. economy grew 5.7% in 2021, which was the fastest full-year clip since 1984, thanks in part to the government pumping out trillions of dollars of COVID-19 relief and big inventory restocking by businesses toward the end of the year.

Growth this year will be more organic. With no more stimulus and rising inflation, consumer demand for goods could soften. Consumer confidence, in fact, moderated in January following gains in the final three months of 2021, the Conference Board reports.

A pullback in goods spending, however, isn’t expected to be severe. The changes in consumer behavior haven’t been as dramatic during Omicron compared to previous variant waves. There also could be growth in some of the services sectors, like travel and restaurants, as consumers watch case rates decline and get out more, but some of this depends on the course of inflation.

Housing and Labor

The return to offices is impacting the housing market. While many people fled large cities during the pandemic, they’re coming back as restrictions ease. What they face when they return are soaring prices for homes and apartments in some cities. New York City and other cities are seeing increases of more than 30%, Redfin reports.

To compete for talent in this historically tight labor market, many companies will continue to offer associates flexible work arrangements so they don’t have to participate in “The Hunger Games” to secure an apartment lease.

Strategies to lure top talent will need to factor in the connection between how a business operates and the cost of housing. Reports show that remote work could ease pressure on housing costs and expand the choices of where millions of Americans live by allowing them to access jobs offered in big cities like New York, San Francisco or Boston.

Inflation, Interest Rates and the Supply Chain

U.S. inflation hit a 39-year high this year as consumer prices soared. That’s why the Federal Reserve is expected to raise interest rates several times this year to help drive inflation lower over the longer term. When interest rates go up, businesses and consumers tend to cut back on their spending.

Offsetting those cutbacks could be the old-fashioned savings account. Americans added nearly $4 trillion to their accounts during the pandemic, and consumer spending in 2022 could be bolstered by those elevated savings rates. Meanwhile, consumers also are taking on more credit card debt and auto loans, reflecting optimism about the economic recovery and signaling their willingness to spend. That’s a positive sign for future consumption.

If there’s some softening in consumer spending, it could be a chance for the supply-demand relationship to balance itself out following the pandemic-related surge for goods people needed as they spent more time at home.

If Omicron is the last big wave of COVID-19, there should be relief for the supply chain problems that have persisted through the last year, contributing to the rising cost of goods. That will allow businesses to continue to build up inventories while critical components that are in high demand, like semiconductor chips, have an easier time making their way to auto manufacturers, communications companies and healthcare organizations.

The war in Ukraine adds another layer of uncertainty to the outlook for the U.S. economy this year, and at this stage there are far more questions than answers. We do know, however, that for the U.S. economy, the immediate impact of the Russian invasion of Ukraine and subsequent western sanctions on Russian individuals, institutions and companies will be more inflation. Even a best-case, quick resolution between Russia and Ukraine will push inflation higher than it would have been, given the rise we have seen in commodity prices (notably oil, gas, and wheat just to name a few).

The three biggest economic impacts are all negative: the same shortages already contributing to inflation, disrupted logistics and an increased chance of central bank overreaction.

While there are signs of some easing of the supply chain problems that have plagued producers during the pandemic, a valuable lesson has been learned that will help producers going forward: The impact of extraordinary shocks like another COVID-19 wave will be felt among our trade partners globally. Innovation and the regional diversification of trading partners will benefit businesses so they can keep on producing even in the face of the next disruption.