Defined Benefit
Defined Contribution
Insurance Assets
Nonprofit

What’s Next for the Post-Pandemic Economy?

What’s Next for the Post-Pandemic Economy?
clock
3 min 54 sec

The fourth quarter of 2021 closed out another remarkable year for the U.S. economy following the wild ride through the pandemic and the recovery, a cycle that began in earnest in February 2020. U.S. GDP notched an incredibly strong 6.9% quarterly gain (4Q over 4Q), which translates to annual growth of 5.7% over 2020. We have not seen such growth since the Ronald Reagan administration, following the consecutive recessions of 1980 and 1982 induced in part to wring double-digit inflation out of the economy.

A short detour into monetary policy history is relevant here. The advent of current monetary policy began during the Reagan administration under Fed Chair Paul Volcker, although he was appointed by Jimmy Carter. Alan Greenspan took on the mantel of “monetarist” from Volcker and enshrined the discipline into Fed policy. That monetarist bent was then modified seriously by Ben Bernanke to address the Global Financial Crisis, when a zero interest rate policy was employed both in the U.S. and by most central banks around the world to rescue the global economy from collapse. Zero rates were combined with massive monetary intervention through the purchase of bonds to keep rates low and infuse liquidity into the system. Emboldened by what we learned in the GFC and the innovation in monetary intervention tools we developed, we applied zero rates with substantial monetary intervention to rescue the global economy again at the onset of the pandemic. After two years and a complete recovery to pre-pandemic GDP levels, the question now is what is next for the post-pandemic economy.

The Outlook for the U.S. Economy

At the risk of not sounding an alarm, we believe supply chains will untangle, labor markets will slowly equilibrate, and supply and demand will line up the economy’s production function and the consumer’s normalizing demand for goods, services, food, and shelter. The Fed has begun tapering its asset purchases intended to supply liquidity to capital markets, and it is strongly signaling that interest rates will rise, with three hikes in the Fed Funds rate in 2022 articulated in the last FOMC meeting in January (the market is discounting four hikes). As policy is withdrawn, the global economy will move to stand on its own two feet, complete with the cycles of growth and recession fully expected in a market system. Top of mind for many is inflation, which hit a peak of 7% in 4Q21. There is now an entire generation of market participants who have never experienced sustained inflation, which was last seen in the early 1980s.

economy

After starting 2021 in the shadow of renewed lockdowns in 4Q20 following then-record spikes in pandemic infections and hospitalizations, the global economy and the U.S. in particular began a spurt of optimistic growth in the spring, and many measures of economic growth took off: consumption, business spending, production, travel, home-buying (which had started surging in 2020), and the opening of retail trade, dining, hospitality, and recreation. U.S. GDP surged in the second and fourth quarters, and the increase of 5.7% for 2021 compares to the 3.6% decline in 2020. Much has been made of the supply chain issues that have restricted output and the supply of goods, the fundamental mismatch between job seekers and available jobs, and the impact of both on potential growth and inflation. We believe the remaining supply chain issues will be ironed out over the course of 2022, increasing the supply of goods and relieving the pressure on prices. We also believe that the labor market will adjust, but that the process may be slower than that for goods and services, and that higher wages may be a feature of the U.S. economy for at least another year and perhaps in to 2023. The job segments most disrupted by the pandemic—retail, wholesale trade, transportation services, hospitality, education, state and local government—are those facing the most obstacles to rehiring at prevailing wages.

A couple of key metrics point toward a slowdown from the manic growth of 2021. First, within GDP, the building of inventory accounted for 4.9% of the 6.9% growth for 4Q21. Inventories built now boost current GDP, but suggest downward pressure on prices of those inventoried goods and slower growth from future production. Second, one of the key forward-looking indicators is the Purchasing Managers’ Index (PMI), which surveys planned activity by market participants—new orders, output, input prices, employment—and covers both goods and services. The PMI for new orders around the globe went flat in August 2021 and stayed flat through December, as first the Delta then the Omicron variants spooked consumers and businesses. Third, at the start of 2022, the PMI for new orders has fallen sharply, driven by weakness emerging in the order data in China and the U.S., two of the biggest global economies.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Macro Trends

Election Tension but No Sign of That in the Markets

Kyle Fekete
Callan expert explains the major trends shaping the global economy as the U.S. election approaches.
Macro Trends

Can the Fed Stick the Landing?

Jay Kloepfer
Callan expert analyzes the 2Q24 global economy and Federal Reserve policy.
Macro Trends

Politics Upstage Economic News

Kristin Bradbury
Callan expert analyzes global economic issues in 2Q24 and the implications of political upheaval.
Macro Trends

Investors, Be Careful for What You Wish

Jay Kloepfer
Callan expert analyzes the 1Q24 global economy and Federal Reserve policy.
Macro Trends

Are We Headed for an Economic ‘Rapid Unplanned Disassembly’?

Alex Browning
Callan analyst examines the state of the U.S. economy and the prospects for a soft landing.
Macro Trends

Higher for Longer? Rates and the Global Economy

Kristin Bradbury
Callan expert analyzes the global economy in 1Q24.
Macro Trends

The U.S. Economy Is More Surprising by the Quarter

Jay Kloepfer
Jay Kloepfer analyzes the U.S. and global economies in 4Q23 and for the full year.
Macro Trends

Grim Economic Forecasts Successfully Thwarted

Kristin Bradbury
Kristin Bradbury provides an assessment of the global economy in 4Q23.
Macro Trends

Stunning Growth in U.S. Economy as Clouds Loom

Jay Kloepfer
This blog post analyzes the economy in 3Q23.
Macro Trends

The Fed’s Delicate Walk on a Tightrope

Kristin Bradbury
Kristin Bradbury discusses the current macroeconomic situation and the outlook as the Fed "walks a tightrope."

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.