The economy at the start of 2022 can be summarized by the proverbial glass-half-full or glass-half-empty scenario. Optimists have many data points to reference: above trend economic growth, unemployment at near all-time lows, and increasing signs of upward wages. However, pessimists have an equal amount of data to point to, such as relatively high inflation rates, supply chain bottlenecks, concerns over the labor supply, and most recently the winds of war. In this blog post, I will attempt to summarize the current data on the national, state, and regional economy, address concerns that continue to plague the economy, and summarize forecaster’s best guesses about what the economy will do for the rest of this year and into 2023.
The Current Economic Situation
Very few forecasters predicted the robust economic recovery from the pandemic (Figure 1). Looking at the historical record, the Nike “swoosh” shape of real economic growth (measured by real gross domestic product – GDP) as predicted by one prominent analyst seems to have been the best description of the pattern. Economic output in the second quarter 2020 plunged to less than 90% of where it had been at the end of 2019. But the early recovery was equally dramatic, with the economy gaining back just over half of that plunge in the third quarter of that year. By the second quarter 2021, real economic output was above where it was before the pandemic, though still below where it had been projected to have been. Although the economic recovery has slowed relatively since the middle of 2021, the economy has grown faster than the pre-pandemic trend. Early estimates of first quarter 2022 growth indicate a further slowing (indicated by the red projected line in Figure 1), but most forecasters see a reacceleration of growth during the rest of the year.
Figure 1. Actual and Projected Real Economic Activity From Fourth Quarter 2019.
Source: Pre-COVID Trend Growth: Philadelphia Federal Reserve Bank; Actual: US Bureau of Economic Analysis; Projected: Author’s calculations from Atlanta Federal Reserve Bank, Wolters Kluwer Blue Chip Economic Indicators, Moody’s Economy.com, and St. Louis Federal Reserve Bank.
The labor market experienced similar dynamics. The national unemployment rate climbed to 14.9% in April 2020, but by the end of 2020 was back below 7% (Figure 2). The combination of the relaxation of COVID mitigations and federal stimulus continued to push unemployment down in 2021. By February 2022, the national unemployment rate was down to 3.8%, just slightly above the figure in February 2020.
Figure 2. National Unemployment Rate, October 2019 - Present.
Nonfarm payroll employment (the number of filled jobs in the nonfarm economy) shows yet another similar pattern. The US lost nearly 22 million jobs from February to April 2020, an unprecedented drop in employment. As with output, about half of those jobs were regained during the rest of 2020. Payroll employment has risen gradually since the start of 2021. By February 2022, there were 2.1 million fewer payroll jobs compared to February 2020 (1.4% of the pre-pandemic level). The recovery in the labor market has been dramatic by almost any measure.
Figure 3. Nonfarm Payroll Employment, October 2019 - Present.
In Illinois and the Springfield region, the story is much the same as the national level. A weekly economic conditions index compiled by researchers from Notre Dame University shows that Illinois has been growing slightly faster than the US economy as whole since the end of the first quarter 2021 (Figure 4). Before that the Illinois economy hadn’t recovered as fast as the nation as a whole. Whether this was due to Illinois keeping mitigations in place longer than other states can only be speculated, but we can observe a clear positive divergence starting in the spring of 2021 and continuing until the Delta wave in the summer. The stronger Illinois performance emerged once again after the peak of the Delta wave and persisted throughout the rest of the year.
Figure 4. Weekly Economic Condition Indicator, Illinois and US, October 2019 - Present.
The unemployment rates for both Illinois and the Springfield Metropolitan Statistical Area (MSA) show a similar pattern to the national data, rising dramatically at the start of the pandemic and then falling throughout 2020 and 2021 (Figure 5). The unemployment rate fell relatively more in Springfield than in Illinois as a whole. By January 2022, the rates were 5% in Illinois and 4.4% in the Springfield MSA. Unemployment rates in Springfield tend to be systematically lower than the state over time, due to differences in industry structure and the dynamics of economies in different parts of the state.
Figure 5. Unemployment Rates, Illinois and Springfield, October 2019 - Present.
Nonfarm payroll employment growth also has been higher in Springfield than in Illinois as a whole since COVID (Figure 6). By January 2022, the Springfield region has a similar level of employment that it did in February 2020. But Illinois nonfarm payroll employment is still nearly 3% below what it was at the start of the pandemic. Once again, industry structure is a likely explanation, with Springfield having relatively higher concentration of Government and Business and Professional services employment and the state as a whole being relatively more concentrated in Transportation and Warehousing, Wholesale Trade, Manufacturing, and Utility jobs.
Figure 6. Nonfarm Payroll Employment, Illinois and Springfield, October 2019 - Present.
Economic Concerns
The story that emerges from the first portion of our analysis is that the economy has recovered nicely from the depths of the pandemic-driven recession. In recent months, however, clouds have emerged to dim the sunshine of a strong recovery. Concerns have grown in late 2021 and early 2022 over labor supply issues, supply chain disruptions, and inflation. And just in the last month, when some progress had been made on those issues, a new concern emerged when Russia invaded Ukraine, threatening energy and grain supplies to Europe, causing a fresh round of inflationary pressure and raising concerns over the economic effects of a regional conflict in Europe. This has clouded the picture for the resumption of strong economic growth.
With regard to labor supply issues, as Figure 7 shows, labor force participation rates have not recovered as fast as payroll employment (the labor force participation rate is the percentage of the population either employed or unemployed but looking for work). By the end of 2021, the rate was still 1.5% below where it was in February 2020. This equates to a gap of about 2.5 million workers. January and February figures showed a marked improvement however, with the gap shrinking to 1.1% or 1.8 million workers.
Figure 7. Labor Force Participation Rate, October 2019 - Present.
During the pandemic, concerns emerged about this trend in loss of the labor force. Several terms for the phenomenon emerged, most notably “The Great Resignation”. The theory was posited that vast numbers of workers, fed up with poor jobs and low pay, quit their jobs. Commentators speculated about the effects of coming labor shortages. However, more careful research has shown that the majority of those leaving the labor market were those nearing retirement or those in retirement who did not return to the labor force (Castro, 2021). In fact, looking at data from prior to the pandemic, labor force participation rates had been falling since 2000, with the rate leveling off just prior to COVID (Figure 8). Also, as mentioned above, the rate has recovered in the last couple of months, suggesting that the fall in the labor force participation since before the pandemic may be cyclical rather than structural.
Figure 8. Labor Force Participation Rate, January 2000 - Present.
Inflation is the second area of concern for the economy. As measured by the Consumer Price Index (CPI), the year-over-year inflation rate climbed from 0.24% in May 2020 to 7.9% in February 2022 (Figure 9). It is projected to go even higher; inflation “nowcasts” from the Cleveland Federal Reserve Bank estimate that the index year-over-year change will be 8.4% in March 2022.
Figure 9. Inflation as Measured by the Year-Over-Year Change in the Consumer Price Index, October 2019 - Present.
Inflation is another area where the concerns are less clear than one might expect. Part of the uncertainty surrounding the effects of inflation comes from its measurement. While CPI inflation is the most well-known measure of inflation at the consumer level, economists have for decades been concerned that it overstates inflation. The concerns come from the narrow composition of the index and its relative rigidity over time, not allowing for changes in consumer spending patterns that we know come with spells of relatively high inflation (on this point see Iacurci, 2022). For these reasons, in 2012 the Federal Reserve Bank switched its inflation target from one based on CPI to one based on what is called the Personal Consumption Expenditures (PCE) implicit price deflator. The inflation rate suggested by the PCE deflator, while still high compared to past years (6%), does not have the same eye-popping levels as the CPI measure.
Many other measures of “underlying” inflation have been developed, mostly by regional Federal Reserve Banks. Table 1 shows some of these, along with two other measures of underlying inflation related to CPI and PCE measures, namely their “Core” measures. Measures of underlying inflation attempt to strip out highly volatile price level changes from CPI or PCE, with the remaining components reflecting longer-term trends in inflation. The core measures exclude food and energy components as these typically show the highest volatility and their short-term movements can exaggerate changes in underlying inflation. In addition to the core measures the Federal Reserve Bank of Cleveland produces measures that capture the price change in the median product. The CPI and PCE both use averages of price changes, which can be influenced by components that move dramatically. The Dallas Federal Reserve Bank produces a measure that “trims” the highest and lowest price increases from the data to measure the middle range of price changes. And the Atlanta Federal Reserve Bank produces a measure that statistically isolates goods and services whose prices change infrequently (and hence are “sticky”). Regardless of the specific measure, most underlying inflation measures indicate that inflation, while higher than in recent years, is much lower than the 8% headline CPI rate.
Table 1. Underlying Inflation Rates, February 2022.
Sources: Core CPI: US Bureau of Labor Statistics; Core PCE: US Bureau of Economic Analysis; Federal Reserve Banks of Atlanta, Cleveland, and Dallas, as indicated.
The other aspect of inflation that makes some economists think that the problem is not as bad as the current numbers say is what is known as inflation expectations. Expectations of future inflation are what create long-run inflation pressures. This is because when individuals expect future inflation to be high they may shift purchases of goods and services to the present to avoid paying higher prices. And they demand greater increases in pay from their employers, which then pass increased costs on to consumers. This creates a spiral of inflationary pressures. So far, the longer-term inflation expectations are relatively in check, or as economists put it “anchored”. When surveyed, consumers expect inflation over the next 12 months to be around 6%, but longer-term 3-year ahead inflation expectations are still under 4% (Figure 10). Also, the interest rates on longer-term bonds, which should be positively related to inflation expectations have not risen that much. That leads many economists to conclude that inflation pressures should abate over time. The only question is how long that will take.
Figure 10. Inflation Expectations from the New York Federal Reserve Bank Survey of Consumer Expectations.
Source: Survey of Consumer Expectations, © 2013-2021 Federal Reserve Bank of New York (FRBNY).
Supply chain disruptions are a final source of concern. The combination of high labor costs and work stoppages caused by COVID mitigations have caused shipping difficulties, resulting in shortages of raw materials and factory inputs. Because of this, shipping and input costs have risen, which feeds into inflation. One gets a sense of how new this phenomenon is by realizing that until the beginning of 2022, there existed no single source of data on supply chain disruptions. Some of the data was available through indices of shipping costs and other data came from surveys of business purchasing managers. Since January, however, the New York Federal Reserve Bank has compiled an index of supply chain disruption through combining data from the various sources. It shows that supply chain pressures erupted in the early days of the pandemic, then receded (Figure 11). But in 2021 they grew steadily, peaking in December globally, with the US peak coming in January 2022. There are signs that supply chain pressures are receding once again. However, with news of a new coronavirus variant, as well as the war in Ukraine, the path forward for supply chain constraints is not entirely clear.
Figure 11. Supply Chain Pressure Indices, Global and US, October 2019 - Present.
Economic Forecasts
Moving forward, there is a high level of uncertainty regarding how the economy will grow. The mean forecast from the Survey of Professional Forecasters, a group of top forecasters from academia and business, is for the economy to grow by 3.7% during 2022, and 2.7% in 2023. However, the range of forecasts from individual forecasters is very large, ranging from GDP falling by 3-6% this year to an increase of over 7%. And the 2023 range is even larger. Inflation rates are projected to fall to 3.1% (for the PCE deflator) in 2022 and 2.2% in 2023. But again, the range of forecasts is very large (Federal Reserve Bank of Philadelphia, 2022). Other forecasts from Federal Reserve Banks and academic forecasters likewise show a wide range of potential outcomes.
When one stops to think about this situation, it’s not hard to see why there is so much uncertainty. There are a vast number of things that could derail economic growth, cause higher inflation, or both. As this goes to press, parts of China are locking down because of a new coronavirus variant. That could exacerbate supply chain issues which might feed through as higher inflation. Or it could pass quickly without causing much disruption. The war in Ukraine could cause disruption of the world economy emanating from Europe. Or the world may adapt to the new reality. We may just have to accept the reality that uncertainty won’t be resolved for several months or even years. We will remain continue to remain watchful of the economy as we move through 2022.
______________________
References
Baumeister, C., Leiva-Leon, D., & Sims, E. (2021). Tracking Weekly State-Level Economic Conditions. Review of Economics and Statistics. Forthcoming.
Benigno, F., di Giovanni, J., Groen, J.J.J., & Noble, A.I. (2022). Global Supply Chain Pressure Index: March 2022 Update. Federal Reserve Bank of New York Liberty Street Economics (March 3). Available at: https://libertystreeteconomics.newyorkfed.org/2022/03/global-supply-chain-pressure-index-march-2022-update/. Accessed March 29, 2022.
Castro, M.F.e. (2021). The COVID Retirement Boom. Economic Synopses, 25 (October 15). https://doi.org/10.20955/es.2021.25 .
Federal Reserve Bank of Philadelphia. (2022). First Quarter 2022 Survey of Professional Forecasters (February 11). Available at: https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q1-2022 . Accessed March 28, 2022.
Iacurci, G. (2022). The Fed Uses One Inflation Gauge as its North Star. Here’s Why. CNBC (January 28). Available at: https://www.cnbc.com/2022/01/28/the-fed-uses-one-inflation-gauge-as-its-north-star-heres-why.html . Accessed March 28, 2022.
___________________
Kenneth A. Kriz, Ph.D. is the University of Illinois Distinguished Professor of Public Administration in the School of Public Management and Policy at the University of Illinois at Springfield. Dr. Kriz conducts research focusing on subnational debt policy and administration, public pension fund management, government financial risk management, economic and revenue forecasting, and behavioral public finance. A nationally recognized scholar for his work on public finance and quantitative data analysis, Dr. Kriz has published over 50 academic journal articles and book chapters along with a textbook on quantitative research methods in public administration and a co-edited book on tax increment financing, a frequently used economic development incentive. Dr. Kriz has consulted with several public and nonprofit organizations on financial and economic matters, including the cities of New York City, Minneapolis, St. Paul, Omaha, and Wichita, and the states of Nebraska and Kansas. Dr. Kriz served as Vice-Chairperson of the City of Omaha, Nebraska Civilian Employees Retirement System from 2006 to 2011 and on the Board of Trustees of the Wichita, Kansas Police & Fire Retirement System and on the Joint Investment Committee for the city’s pension funds from 2014 to 2018. Dr. Kriz was a Fulbright Scholar in the Republic of Estonia during academic year 2004-05 and a Fulbright Senior Specialist in the Czech Republic in 2008.
