Catalyst News

2022 Mid-Year Economic Update

by Sarina Freedland | Jun 21, 2022

If you thought volatility and uncertainty were left behind in 2021, think again. It seems that 2022 has only magnified the amount of volatility and uncertainty the economy and financial markets are facing. When we said good-bye to 2021, the pandemic was winding down, people were starting to get a sense of normality back in their life, and the labor market was strong. The one main hurdle facing the economy was inflation. The Federal Reserve announced at the end of 2021 it was turning its focus 100% to curtailing the unprecedented rise in inflation and would start raising rates mid-year after it finished its bond buying program.  

Well, we just passed the mid-year point and the Fed has already increased the short-term benchmark rate by 150 basis points. And, it has doubled the amount of bonds it will run off in an effort to shrink the balance sheet, a process that will last through at least September. The Federal Reserve and members of the White House administration have acknowledged they were caught off guard by the intensity of events early in the year. The COVID and pandemic uncertainties from 2020 and 2021 were quickly and unexpectedly replaced by Russia’s attack on Ukraine and multiple COVID-lockdowns in China. The convergence of these events intensified the already strained supply issues the global economy was undergoing. The fighting between Russia and Ukraine has created a threatening shortage of grain and oil that reaches across the globe. Inflation has risen to the highest level in 40 years. Gasoline prices are over $5 a gallon in half the country. The rise in wages that began last year is quickly falling behind the increase in prices. Inflation-adjusted average hourly earnings fell 3% in May from a year ago, the biggest decline in over a year.  

The changes that have occurred thus far in 2022 will have far-reaching impacts on consumers. The Federal Reserve’s intention to slow demand, or demand destruction, by raising interest rates threatens to derail the economy before prices have time to move lower. Mortgage rates are at the highest level since 2009 and quickly approaching 6%. Home prices, which began rising during the pandemic, are 20% higher today than a year ago. The impact of higher rates and prices is making home ownership unattainable for the average person. Corporate earnings took a hit last quarter as companies overestimated consumers’ ongoing spending habits. It won’t be long before some companies begin cutting staff in a quick attempt to help restore earnings. The negative impact to companies will soon be show up in peoples’ 401k’s. This will have a tremendous psychological impact on consumer spending. The average savings rate has fallen to 4.4%, the lowest level since 2008. To combat higher prices, consumers are pulling out their credit cards. Credit card balances have increased 66% from the end of 2021. As the Fed continues to raise rates, the interest rate on credit cards will increase, making it more challenging for consumers to pay off the debt.  

It is difficult to look past the doom and gloom events of the first half of the year. Economists are split on whether the economy will end up in a recession in 2022 or if it will push forward to 2023. There remain many factors out of the Feds control, namely rising commodity prices and supply chain disruptions. The path to making life more affordable for Americans has become more challenging, but the Fed remains committed to restoring balance between the labor market and prices, ultimately providing a labor market where wages keep up with prices.