Saving Money

How Last Year’s Tailwinds are Shaping the Economic Outlook for 2022

2021 tailwinds are growing into 2022 headwinds. No one knows what 2022 will hold for investors and for business owners, but the economic and financial landscape is shifting rapidly. On today’s episode of Money Talks, host Tiffany Kent, Certified Financial Planner and Founding Partner of Wealth Engagement, LLC, breaks down the economic climate and its effects on small business.

Transcription: 

Tiffany Kent:
Before we look forward, let’s take a look at how economists assess economic activity. Most economic activity is measured in percentage growth terms, not nominal terms. Let’s look at the following example. If the government gives consumers $1 trillion to spend, it will boost GDP by at least $1 trillion. In this example, this means fiscal stimulus will boost GDP to $21 trillion from $20 trillion, equating to 5% growth.

Tiffany Kent:
Without government stimulus and excluding any new economic activity, GDP will retreat to $20 trillion in the following year. As a result, GDP will decline by 5%. While nothing changed with the economy, the 5% decline will be considered a recession. To avoid zero or declining economic growth, again, assuming no other economic activity, the government will need to provide at least $1 trillion and then some of new stimulus. As you can clearly understand, stimulus boosts economic activity. However, it detracts from economic growth rates unless it grows each year. So the question becomes, can the economy make up for it. In order to answer this question, let’s review where we are coming from. As we all can recall, in March 2020, the sky was falling, and investors aggressively sold stocks, and several businesses had to shut down, but the government was there to help out and it handed out money to boost economic activity and the federal reserve cut interest rates.

Tiffany Kent:
Despite COVID shutting down large segments of the economy, economic data quickly recovered to pre COVID levels. Record low interest rates, massive consumer and corporate stimulus, and enormous liquidity kept the tail winds strong and investors piled into the stock market. People bought houses, vacation homes, and we had a pretty good economic recovery. The latter half of 2021, vaccines increased consumer demand and a record amount of savings added further growth to the economy. However, the flares of inflation began picking up at that point. As we start 2022, tailwinds have turned into headwinds and now they’re hitting us in the face.

Tiffany Kent:
Now let’s consider how that affects our 2022 outlook. The first impact. We should expect a decline of fiscal spending throughout the latter part of 2021, and even into 2022. COVID related stimulus ended or will end shortly. The closure of these programs will further reduce the flow of stimulus to consumers. For example, the recently extended student loan deferment program ends in a few months. In this case, many student debtors consume goods and services money that should be servicing student debt. Once the deferment period ends, spending in many cases will decline. Also, the child tax credit will end shortly resulting in the shortfall of funds for those receiving the benefit. Likewise, those that did not pay rent are now left with back payments or higher rents to make their landlords whole. So Goldman Sachs expect a sharp decline in fiscal spending related to the pandemic in 2022.

Tiffany Kent:
The second impact that we can expect is the federal reserve is tapering quantitative easing. QE provides vast amounts of liquidity to the financial markets. As the fed backs away, it reduces liquidity to the markets. The fed is also expected to raise interest rates three times this year. Higher interest rates will increase interest expenses for companies with floating rate debt, consumers and the government. Additionally, those using loans to leverage assets will have to pay more for the leverage. This will undoubtedly cause some investors to reduce or remove leverage as the potential returns diminish. The third impact on 2022 is the savings rate is back to normal. The combination of direct government stimulus and the inability to spend money during lockdowns resulted in unprecedented savings rates. The savings rate jumped to levels that were twice as high as previous levels, since at least 1959. Government stimulus to consumers provide a bonanza of spending power for consumers.

Tiffany Kent:
The savings rate is now back to normal as people get back to their normal lives. Most consumers, especially in the middle to lower income classes, have fully exhausted extra savings and must either reduce spending or increase their use of debt. Credit card debt and home equity withdrawals are both increasing. While such funds can propel additional spending, it will not be nearly the same as the enlarged savings rate we experienced during COVID. Furthermore, higher interest rates will make debt less appealing. Inevitable credit card and home equity are limited based on wage growth and the ability to service their debt. Last difference from 2021 to 2022 is inflation. Prices are on the rise. Higher prices mean consumers spend more to get the same amount of goods. If wages keep up with inflation, the consumer is indifferent. Inflation is running at 6.9%, over three times higher than the fed’s stated 2% objective. At the same time, wages are growing at a lesser rate than inflation.

Tiffany Kent:
Average hourly earnings are at 4.8%. While historically robust, real wages factoring inflation are down two percent. Inflation is pressuring the fed to prioritize its fight against inflation. Might the fed have to choose between inflation and asset prices? Ohio Democrat Sherod Brown recently shared thoughts on that. “The fed should make sure our economy works for workers and their families, not Wall Street.” Also consider that inflation is responsible for the recent string of poor consumer sentiment. People usually spend more when they have a positive outlook. The University of Michigan’s current and expected consumer sentiment indices are at a near 10 year low. The index sits at 70.6. In April 2020, almost two years ago, during the peak of COVID lock downs, it was at 71.8. In September 2008, when Lehman and others were failing, it was at 70.3. Pent up demand is fading quickly. Having been deprived to vacations, eating out in a host of other activities, people were hungry to return to normal.

Tiffany Kent:
Vaccines further raise comfort levels and allowed many stores and venues to return to normal. Consumers splurge as they bought those things they couldn’t buy during lockdowns. Not only did they travel and go out to dinner, but some bought cars and houses and other big ticket items. Most of that pent up demand is quickly diminishing. The bills from those spending sprees are mounting and life is slowly becoming more normal by the day. This additional source of spending is fading quickly. So what should you do? Now is the time to be aggressive and thoughtful about your business. With equity valuations high, and debt still relatively cheap, maybe it’s time to consider selling your business. If your business generates a lot of free cash flow with cash yields still high, private equity or someone who can borrow cheaply can still make a great return on buying your business.

Tiffany Kent:
If you’d like to explore this idea further, talk to your financial advisor, or send me an email at tiffany@wealthengagement.com. Secondly, many companies were able to push higher costs onto consumers. Inflation is in the process of peaking. Shortages and supply line problems are slowly diminishing. At the same time, demand is normalizing and there is little fiscal stimulus on the horizon to boost demand further. While inflation will ease prices, prices are sticky. Factors such as raising wages and prices may keep your margins elevated, but you will need to think about ways to increase productivity, do more with less. Times were pretty good for both the economic recovery and the stock market, but we should expect more muted returns for this year as we get back to normal and back to work. Stay tuned for next week’s show where I will talk about inflation, the good, the bad, and the ugly parts of inflation. That’s all for today. See you next week on money talks on the Atlanta small business network.


The Atlanta Small Business Network, from start-up to success, we are your go-to resource for small business news, expert advice, information, and event coverage.

While you’re here, don’t forget to subscribe to our email newsletter for all the latest business news know-how from Atlanta Small Business Network.

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button