As the infection rates of COVID-19 soar around the world and Omicron becomes the primary variant, businesses and consumers alike are preparing for the New Year with skepticism and hesitation.
After the clock struck midnight on New Year's Day, the economic issues of 2021 didn't magically disappear. In fact, many experts expect they will continue well into 2022.
Partner and Manufacturing Practice Leader Christopher Fagan at Moore Colson CPAs and Advisors said he expects headlines related to inflation, labor shortages and supply chain disruptions will continue into the year.
"As we move into 2022, the Federal Reserve is working to reduce monetary supply to curb inflation," he said. "Specifically, there has been speculation for up to three interest rate increases in 2022 along with plans to reduce bond purchases. Reducing monetary supply and liquidity in the markets reduces the buying power of the economy at large, therefore decreasing demand and hopefully curbing inflation."
Tom Smith, a professor in the Practice of Finance at Emory University's Goizueta Business School, agreed with Fagan on inflation, stating that is is the biggest trend he expects to continue in 2022.
"We are currently experiencing between 6 to 7% year-over-year inflation," he said. "I expect that the Federal Reserve will announce a 25 to 50 basis point increase in the Federal Funds Rate Target in mid to late January 2022, followed up by another 25 to 50 basis point increase at the end of the first quarter (or start of the second quarter). The Fed will push up interest rate targets and slow the amount of money in our economy to slow the upward pressure in prices. The trick for the Fed will be to slow down prices without causing our economy to slide back into an economic recession."
Fagan said labor shortages will continue as the labor force participation rate (the percentage of the population that is actively involved in the labor market) has reduced by approximately 1.5% since the beginning of the pandemic in March 2020.
"Supply chain disruptions show no signs of slowing down as the world appears to be trending towards more lockdowns due to the Omicron variant," he said. "While reduction in the economy’s buying power will help with supply chain disruptions, it can also reduce companies abilities to buy excess inventory to alleviate current disruptions."
Smith described the issues in the labor market as a "mismatch": a lack of workers applying or showing up for work and businesses advertising jobs but having difficulty filling vacancies.
"The labor force participation rate fell after the start of the pandemic and has not returned to pre-pandemic levels," he said. "Millions of people who were working have permanently left the workforce because of retirements. The resulting change in the labor market is causing a disequilibrium in the market that is pushing up wages and making it difficult for firms to find workers. Because there are so many job openings, workers appear to be looking around for the 'best deal', so to speak. In some situations, people are accepting jobs and then never showing up because something better came along, or are leaving work during a lunch break and then never coming back. This mismatch will continue well into 2022. Perhaps the economy will see a more settle labor market by the end of the second quarter."
Companies should adapt to the decreased workforce participation by using the emerging robotic process automation tools on the market, Fagan said.
"These tools are becoming more adept at performing tasks that have historically been performed by professionals who aren’t actively participating in the workforce," he said. "Additionally, environmental, social and governance industries continue to mature and have a lot of federal support which has been attractive to potential employees and investors."
When it comes to the local economy, Fagan said the prevailing economic trends related to manufacturing — supply chain disruptions and labor shortages — will continue to hinder Cobb County businesses.
"Inefficient markets due to the Omicron variant appear to be on a path to significantly disrupt fragile supply chains and labor supplies in 2022," he said.
Consumers can expect increased prices and spotty consumable product availability, Fagan said.
"Interest rate increases will impact consumers looking to purchase homes," he said. "Retail and hospitality will continue to struggle to adequately staff their businesses which will frustrate consumers in the coming year."
Smith said consumers should also expect higher prices for the goods and services that they purchase on a daily basis — groceries, gasoline, basic necessities.
"I do expect that housing prices will continue to be high, but I believe that housing prices will settle by the end of the second quarter," he said. "There is a push in new housing and the increase in supply will stabilize prices a little bit. I don't believe that we are seeing the same type of housing spike that we saw in 2006, but it is a housing spike and, historically, these housing spikes are followed by decreasing prices. I would advise patience concerning purchasing a new house."
In preparation for these trends, Fagan said consumers should continue to be patient and have confidence that supply chain issues and labor shortages are likely transitory.
"Wage and cost inflation appear to be more permanent," he said. "Elimination of government programs such as enhanced unemployment, and elimination of the Advance Child Tax Credit Payments will reduce cash flow for most consumers in 2022. Being cognizant of spending patterns and understanding that reduced cash flows along with inflation in cost of goods and services will help consumers weather what appears to be an uncertain 2022."
To help consumers manage these rougher parts of the economy, Smith said he's a big fan of building a budget, sticking to it and finding ways to save a little more each year.
"I recommend trying to put any raises or bonus money into an investment account or savings account," he said. "Everybody, regardless of income level, could build an active plan for building wealth. Consumers should think more about how to save and invest."
For emerging markets, Smith said while there is a lot of buzz surrounding the crypto-currency market, he advises patience in regard to investing in crypto-currencies.
"These assets are here to stay and I believe that many younger investors are putting their money into these types of assets," he said. "However, they are incredibly risky — the value of crypto-currencies can and do swing widely and wildly. I wouldn't invest in a crypto just because Elon Musk or another celebrity type is bragging about it on Twitter — it's not a sound investment strategy to be buying on rumors and memes. Sure, you could catch a break and experience a nice return. But, you could, just as easily, purchase an asset and see its value plummet because the celebrity has fallen out of favor or does something foolish."