Economy Outlook: David Mitchell

2022 Projection: If COVID is like it appears to be now, pretty mild, I’m cautiously optimistic that we’ll see a return to normality in the summer. If people start going back on vacations, going back to restaurants more, then I could see where 2022 might be a pretty good year, especially if people are getting a nice bump, 4% or 5%, in their pay.

We’ve seen an economic recovery in this second half of the year from the COVID-19 pandemic. What are some of the major themes you’re expecting for the economy in 2022?
No. 1 is that you’re not going to see unemployment rates falling. They’re essentially already fairly low. You’ll see increases in employment, though. The unemployment rate can rise or fall depending upon whether people are getting jobs or not, and it can rise and fall upon whether people are entering or leaving the workforce. We’ve seen lots of people leave the workforce. I think you’re going to see some of those people coming back. I think that for a couple of reasons. The omicron [variant], it looks like it’s going to be fairly mild. It’s not going to kill nearly as many people as delta or the original COVID virus. I think that’s going to go a long way toward getting people back to “normal.” The other thing that I think is going to be a big issue is inflation. I think you’re going to see the (Federal Reserve) trying to fight inflation. That’s going to mean raising some interest rates. That’s going to take people a little bit back. They’re going to see businesses starting to raise wages because of inflation. That will bring people back in. Also, people’s stimulus money and savings, people have been spending that down. That’s going to start driving some people back into the labor force because they’re running out of money.

Comparing November 2020 with November 2021, we saw a 6.8% jump in inflation, the biggest jump in nearly 40 years. The Fed has gone back and forth with its plan to tackle this. Do you think the policy that they just put out for three rate hikes next year will be what they land on?
I think so. They were calling (inflation) transitory. I don’t know if they were calling it transitory for political reasons or if they were doing it because they actually, literally thought it was transitory. One of the great things about the United States is that the Federal Reserve is independent from the political body. In the past five years, you’ve seen the Fed becoming a little bit more politicized. This is one of the things that I didn’t particularly like that [former President Donald] Trump was doing, where he was constantly criticizing the Fed. It seems like they’ve kind of relaxed their political independence a bit when they were calling (inflation) transitory. This is what [President Joe] Biden would want them to do, to say this is not a big problem. The fact that they’re changing their language now I think is a good thing. (The Fed) said we need to make sure that we get a handle on inflation. That’s a good sign.

If wage hikes continue, will that impact corporate profits?
I think they’ll try to pass that on in the form of price increases. This is the thing about inflation that’s so bad. Now people have had a year almost of rising prices and they’re saying I need a raise. The biggest cost for firms is wages, even these large, multinational corporations. If wages are increasing at a fairly significant clip, say 5%, 6%, 7%, 8% a year, that is reflected in the cost of the product. This is why inflation, once it gets into the system, it’s really, really difficult to get it out. In order to squeeze it out, you actually almost have to have a recession again. I don’t think they’re going to have to move to that extreme yet in 2022, they might have to in 2023 or 2024 if people’s inflation expectations don’t change.

The S&P 500 has seen 28% gains year to date. In 2022, will COVID have as big of an impact on the stock market? And will gains continue to increase at this rate?
Statistically speaking, we will not. You’re going to have some cooling off. The gains for the past several years have been pretty significant. I’m a big believer in this kind of return to the median. It can’t outpace what’s happening in the U.S. in the long run because it’s a reflection of what is going on in the U.S. The reason that we’ve seen a lot of these huge gains is we’ve seen so much stimulus. I can’t go anywhere, so I’m going to buy a Peloton bike and I’m going to refurbish my home. What do you do now when COVID is kind of done and the firms say we want you to kind of return to the office? Now I need fewer Pelotons. I’m going to be at home less; I’m going to be driving more. Some of that’s not going to come back. It’s not going to go back all the way to the way it was. But with a kind of return to normal, no stimulus, trying to fight inflation, I think you’re going to see corporate earnings not being exactly what they were. I’m not seeing a bear market, but a return to “normal” returns that you would have with the S&P 500, 8%, 9%, 10%, 12%, 15%.

Will supply chain challenges persist into 2022, and if so, what kind of impact will that have?
Long, long term people could say to themselves, perhaps we don’t want to depend so much on some of these other countries for our stuff. It’s possible that you’ll start seeing some of the things that we used to get from other places coming back to the U.S. Supply chain issues will continue to be an issue. If omicron is quick and mild and we don’t have some other variant that comes along that’s a whole lot more deadly, I think you could start seeing a return to normality by the second or third quarter and some of these supply chain issues start to go away. Of course, I’m an optimist.