Following the 2022 State of the Region data presentation Charles L. Evans, president and chief executive officer of the Federal Reserve Bank of Chicago, took the stage to address the U.S. economic recovery from the COVID-19 pandemic and economic developments throughout the region.
A Rapid Recovery
Even in face of challenges created by the COVID-19 pandemic, the U.S. economy experienced a rapid recovery throughout 2021. Not only did households and businesses show astounding ingenuity in developing ways to operate safely and effectively, but the health care sector was also able to develop and deploy safe vaccines in record time.
“By the second quarter of last year real gross domestic product in the United States had surpassed it’s pre-pandemic level and despite new waves of infections, during the second half, growth for the year was a robust 5.6%, and the economy appears to have entered 2022 with solid momentum,” noted Evans.
The Labor Market
While the United States unemployment rate saw a high of near 15% early in the pandemic, it declined relatively quickly and now stands at 3.8%, near pre-pandemic levels.
Added Evans, “If you just look at the national unemployment rate, the labor market appears to have largely recovered from the pandemic…and as the pandemic recedes further, strong labor conditions will likely draw many of those sitting on the sidelines back into the workforce and help alleviate labor market pressures.”
The Supply Chain and Inflation
The pandemic has set into motion many significant changes to the economy and to how business is done, including a shift in spending from services towards goods. This shift to goods has had a strong impact on the supply chain.
“As a result of these shortages, auto and truck production has been severely curtailed and with supply curtailed and the demand still robust motor vehicle prices have surged more than 23% over the past year. And this is just one story,” said Evans.
Strong demand for products and continued challenges in the supply chain in 2021 resulted in prices rising across a broad range of goods and services, with inflation reaching 6.1% in January.
“A broad takeaway I get from the data and from discussions with business and community leaders is that the markets are working to reallocate scarce resources to their most critical uses,” said Evans.
Economic Growth Projections
Evans noted that even with a tightening in monetary policy, economic growth is expected to be quite good in 2022. For GDP growth the estimated median projection for this year is +2.8%, with growth moderating near +2% in both 2023 and 2024. In addition, the U.S. unemployment rate is expected to remain at 3.5% through the end of this year, through 2024.
What about inflation? Evans explained that the U.S. should see a reduction in inflationary pressures as the U.S. continues to adapt to and control the virus, as market forces work to reallocate productive resources, and as monetary policy tightens.
Though the 2022 median forecast for inflation is high, it is expected to moderate but that timeline will be greatly impacted by external factors: (1) the Russian invasion of Ukraine and (2) additional outbreaks of the virus.
“With all the uncertainty we face today, policymakers need to be cautious, humble, and nimble as we navigate the course ahead. Monetary policy is not on a pre-set course. Each decision will be based off an assessment of economic and financial conditions, as well as the risk to the economy,” explained Evans. “But all of our decision making will be squarely focused on achieving the Federal Reserve’s mandated policy goals of maximum inclusive employment and inflation that averages 2% over time.”
Roop Raj, 5 p.m. anchor of Fox 2 News, joined Evans on stage to further discuss monetary policy and the current state of the region’s economy.
Low Interest Rates
Raj noted the increase in interest rates. Following two years of extreme lows, interest rates have begun to rise but overall, remain low. In fact, interest rates have been relatively modest for the past 15-20 years, in response to the long-term reduction in inflation and the growth limitations brought on by the aging world population.
Noted Evans, “Growth solves a number of problems…and if we continue to struggle with labor force issues there is going to be challenges to business models because of the aging of the population. Every year it has gotten worse.”
The Impact of Russia’s Invasion of Ukraine
In addition to supply chain challenges, the humanitarian crisis in Ukraine prompts the question of how unrest in other countries will impact the U.S. economy.
Evans argued that the “Russian invasion of Ukraine has changed how countries are going to be dealing with each other for quite some time…because this has been such an outrageously aggressive and unprovoked attack, we have to rethink the administration, NATO, and other countries are coming together with sanctions on the Russian economy and that’s going to change our interactions.”
The Small Business Impact
There are several concerns for small businesses in the face of high inflation, including purchasing power and labor fatigue.
“For a lot of small businesses, the margins are very thin, they are constantly on the cusp of ‘this isn’t going to be a good year, so raising prices aren’t necessarily going to work out for them,” said Evans.