2022: Moderate GDP, Persistent Inflation

Post from First Trust Economics Blog

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist 

Dec. 20th, 2021

From 30,000 feet, the COVID lockdown and re-opening

played out pretty much like we thought. GDP collapsed in the

first half of 2020, then exploded in the third quarter, followed by

strong, but erratic, quarterly growth ever since. The fourth

quarter data, when it’s released in January, will show 2021 had

the fastest GDP growth, and highest inflation, since the 1980s.

As a reminder, this is not a normal business cycle and

shouldn’t be treated like one. We have never locked down

businesses, we have never seen such a rapid peacetime expansion

of federal spending, and we have rarely seen such a huge increase

in the M2 measure of money.

Shutting down the economy destroys supply chains because

they work best with a free flow of information. And paying

people not to work after the economy is open makes it worse.

Small businesses have suffered much more than large

companies, so while profits and stock prices are at, or near, alltime

highs, real GDP will still end 2021 lower than it would have

if COVID had never happened. Meanwhile, inflation under

COVID has been much higher than the pre-COVID trend.

Normally, government involvement in an economy does

not alter its path so much from quarter to quarter, or year to year.

Sure, Fed rate hikes, or tax rate changes must be accounted for,

but the massive nature of government interference in the

economy since March 2020 has made us all Keynesians now.

Factoring in how much spending is borrowed from the future,

how much new money the Fed is printing, and whether tax rates

will become more punitive is all part of any forecast.

For example, some of our economic peers are now saying

2022 growth will be slower than it otherwise would have been

because Joe Manchin has said “no” on the Build Back Better

plan. Their forecast argues that fewer government handouts will

reduce spending and therefore GDP growth.

We think that is simplistic analysis. Yes, fewer handouts

will lead to a reduction in deficit spending. However, with 11

million job openings, it will likely lead to more actual

employment. So, any slower growth from less government

spending will be offset by more growth from the private sector,

which will help supply chains. At the same time, without BBB,

tax rates will not rise, which is a positive for longer-term growth.

Putting it all together, we expect real GDP to rise at about

a 3.0% rate in 2022. Why slower than 2021? Because 2021

was artificially boosted by big deficit spending. Why not slower

than 3.0%? Because small businesses will bounce back and the

BBB tax hikes and distortionary spending are now less likely.

For inflation, it looks like the Consumer Price Index will be

up in the 6.5 – 7.0% range this year. The consensus among

economists is that will slow to 2.7% next year, but we think

inflation will run 4.0% or more. On a granular level, look for

the rental price of housing, which makes up more than 30% of

the CPI, to be a key driver of inflation for the next few years. In

addition, we expect oil prices will move higher again as

regulatory ambiguity related to environmental rules curbs


For the job market, look for solid job growth to continue.

Job openings remain plentiful and, slowly but surely, some of the

people who have left the labor market should get pulled back in

by rising wages. Look for about 325,000 – 350,000 jobs per

month next year. Don’t get too excited, though; at that pace, at

the end of 2022, we’ll be barely 700,000 jobs above the pre-

COVID level. Not impressive for a time period of almost three

years. Yes, the unemployment rate should get down to the 3.5%

the Federal Reserve expects by the end of 2022, equaling the pre-

COVID rate, but it’ll be with much lower labor force

participation, so 3.5% is not as impressive as it sounds.

Put it all together and we have an inflation problem that is

obviously not “transitory” and economic growth that’s a glass

half full: good growth versus historical measures but not yet

enough to get us back to where we would have been if COVID

had never happened.