U.S. economic growth continues to surge. And despite recent geopolitical action taken in Ukraine, which is causing markets to fluctuate, the U.S. economy will continue to see gains in 2022. That was the tone of the overall message of the 2022 Economic Forecast on Feb. 24.
This year’s event, sponsored by University of Delaware’s Alfred Lerner College of Business and Economics’ Center for Economic Education and Entrepreneurship (CEEE) and the Lyons Companies, was held virtually. Video can be found online.
Featured speakers included Loretta Mester, president and chief executive officer of the Federal Reserve Bank of Cleveland, Michael Farr, president and CEO of Farr, Miller & Washington LLC and chief market strategist for Hightower Advisors, and Hilary Provinse, executive vice president and head of mortgage banking at Berkadia, a Berkshire Hathaway company.
Dave Lyons Jr. gave opening remarks for the event, which his father David Lyons Sr. started in 2006, to educate Lyons Companies employees about how changes in the economy were expected to affect clients with whom they worked. It grew in 2007 when the company partnered with both UD to host the event and Michael Farr to speak. Carlos Asarta, Lerner College professor of economics and James B. O’Neill CEEE director, represented the university during the presentation.
Farr described David Lyons Sr., who passed away in 2018, as a great friend.
“David Lyons really cared about his community and he cared a lot about Delaware, and he wanted to make a difference. And this was one of the many ways David did that,” Farr said. “I always like to remember him as we start our program.”
A Look into the U.S. Economy
Mester, who previously participated in a 2019 Economic Forecast at UD, was the keynote speaker. She began her remarks assuring people that the U.S. economy was not to be underestimated. The proof was in the numbers.
Despite pandemic challenges the GDP grew five and half percent in 2021, which was the highest pace since 1984. U.S. firms added 6.7 million jobs to their payrolls and the unemployment rate dropped to close to 4 percent, which was close to its pre-pandemic level.
“The economy’s strength was reflected by a strong demand by households and businesses, which was supported by fiscal and monetary policy,” Mester said. “And because vaccinations allowed the economy to reopen.”
Mester alluded to demand colliding with supply and labor shortages at one point, which caused prices to soar. As a result, inflation is currently the highest that it has been in 40 years, and nominal wages are accelerating.
“Differences in virus conditions and virus containment policies across the globe have disrupted global supply chains. Firms are struggling to get necessary parts and materials through clogged ports and transportation channels,” Mester said.
Mester said that because of this many businesses are facing higher costs for materials and this continues to put a strain on the economy. But there are hopeful signs, she said. Some businesses have started reporting that delivery times were becoming more predictable, but they had to wait longer than normal. There are signs that by the second half of 2022 there will be an easing of supply chains.
In addition to supply chain hiccups, businesses are struggling to find workers, Mester said. Payroll employment is almost 3 million jobs below its pre-pandemic rate. Pandemic related factors including child and elder care and fear of the virus have contributed to these factors. This does not include gig economy jobs. This number is low despite strong job level gains. Ultimately those job gains suggest positive signs for the labor market, Mester said.
“Now these factors should fade overtime, but the precise timing and magnitude are open questions. And if you look over a longer horizon, labor force participation has been trending down since the early 2000s due to demographics, and add to that that many more people retired during the pandemic than predicted,” Mester said.
What this has done is prompt businesses to increase wages, offer signing bonuses, offer remote work and more flexible work schedules. In many cases, wage increases are not keeping up with inflation, Mester said. Personal consumption expenditures (PCE) inflation was above 6 percent by the end of 2021 and personal consumer price index (CPI) inflation was above 5 percent. While inflation is currently high Mester said she expects it to improve but still be over 2 percent for 2022 and 2023.
To slow inflation, which Mester said is the Federal Open Market Committee’s goal, accommodation will be removed and the Fed Fund rate, which is now at zero to a quarter percent, will be increased starting in March.
Ultimately, Mester said she thought that the economic outlook for the remainder of 2022 would be that expansion will continue. She said that U.S. households and businesses have healthy balance sheets and that once the Omicron variant is behind us, the country’s demand should rebound.
The Housing Economy
Provinse gave insight into the commercial real estate market as it relates to the economy. Commercial real estate was hit hard by the pandemic but there remain opportunities on which investors can capitalize, she said. Domestic and international firms have already started doing so.
Provinse said similar to the way that some American households are flush with money because of the pandemic so are companies, and that 2021 saw the largest transaction volume and interest in commercial real estate in the history of the markets. She expects an additional 5-10 percent increase for 2022. Investors need somewhere to park their money, Provinse said, and commercial real estate is a way to keep up with inflation because property owners can raise rent and lease costs.
“So we’re seeing a lot of investment as this kind of potential hedge against inflation costs,” Provinse said.
Another positive for the industry is that, although interest rates will go up in the coming two years, cap rates for commercial real estate will hold steady. That, combined with a slowed but still increasing GDP, is great for the long term in commercial real estate, Provinse said.
As part of her session, Provinse broke down three sectors of the commercial real estate business, how they have been affected by the pandemic and their outlook moving forward. The first sector was office space. Provinse pointed out that she was giving her talk virtually from her home office to underline the fact that many employers had to switch to offering remote or hybrid work schedules during the pandemic, but now companies want to know when employees will return for in-office work.
“I think now that we’re kind of getting past Omicron, I think a lot of firms are saying April 1st is our return to office date,” Provinse said.
Provinse said more companies will shift to requiring employees to return to the office, which will drive demand for commercial real estate, and is one of the reasons why most companies haven’t made dramatic changes to their lease terms. Ultimately, companies believe in-person work is better for training and company culture, Provinse said.
Retail and the hospitality industry have struggled during the pandemic, but are starting to come back, Provinse said. In retail, people are shopping more online and regional malls are getting crushed. There is no data to show when that trend might change. But strip malls anchored by grocery stores have seen strong growth and traffic.
“We all still have to go to the grocery store,” Provinse said. “We all want to get our nails done at the nail salon, so those strip malls are coming back and I think we see positive trends in retail for 2022.”
The hospitality industry was absolutely hit the hardest by the pandemic, Provinse said. The world was on lockdown at home without places to go. The good news is that leisure travel has come back with high demand. Provinse said Americans have lots of money in their pockets from the pandemic and are willing to spend it on leisure travel, which has been great for hotels. She cautioned that business travel has not seen the same boost, and that because of how people are able to communicate via Zoom, she doesn’t know if people are going to feel the urgency to travel as much for business.
Provinse concluded her remarks with what she described as the ”belle of the ball in commercial real estate”: the housing market. It was the hottest sector and saw the most growth. What has stood out because of limited supplies to build homes is rental housing, Provinse said. Leasing activity is the highest it has ever been and apartment occupancy is at an all-time high, and that means that rent prices are going up.
This trend will continue in commercial real estate, she said, and it has spawned movement of people to the southern United States.
Provinse pointed out that 700,000 Americans moved to states like Georgia, Florida, Tennessee and the Carolinas in 2021. There were markets in Florida that saw 40 percent rent growth last year, Provinse said.
Effects of International Events on the Economy
Farr focused his portion of the talk on how the invasion of Ukraine by Russia might affect the world economy. He listed interesting facts about Ukraine and why it is so important. Ukraine is the 5th largest grain exporter in the world and they are the number one supplier of corn to China. Ukraine supplies more than 10 percent of food to 14 countries around the world.
“This is really Europe’s breadbasket,” Farr said.
Russia, in turn, supplies 25 percent of Germany’s petroleum and 32 percent of its natural gas. In Germany, 25 percent of its electricity is generated from natural gas. The Russian economy has suffered, the stock market there has suffered and sanctions will be severe.
All of this will potentially slow growth for the entire European Union, Farr said, and the EU is a big trading partner to the U.S. and the rest of the world. Farr speculated that the invasion’s effect could slow business conditions, which would take pressure off of the Federal Reserve to slow down the economy to combat inflation. He continued by saying that with the Fed already announcing that there will be interest rate hikes, there is the possibility for policy errors to be made on how much to hike rates and how many time to raise them. This is made tougher because the Fed has to pay down a $9 trillion portfolio at the same time, which they have never had to do. Ultimately, this might affect the average American and leave them with less money to spend despite having larger paychecks.
This year’s presentation came on the heels of the CEEE celebrating its 50th anniversary in 2021. Asarta thanked the Lyons Companies and participants for their long-standing partnership.
“Last year marked a very special year for our center as we celebrated our 50th anniversary and, while we are 50 years old, our mission has not changed since 1971– to prepare K to 12 educators and students in economics, personal finance and entrepreneurship with the ultimate goal of seeing all students graduate as economically literate and productive citizens. It’s thanks to your support that we have been able to continue with our mission.”