From ‘transitory inflation’ to the global supply chain crisis, here’s what hit the economy hardest in 2021

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Thinking back to a turbulent 2021, economists and analysts touched on a few themes that have defined the economic trajectory of the past year – and which they believe will shape the contours of money, markets and management in the future. the dawn of the new year.

The year began with the promise of an end to the coronavirus pandemic with the approval of highly effective vaccines and American consumers willing to spend. It ended with the cloud of the pandemic still hanging over the US economy as successive variants sparked new waves of disease and lockdowns further exacerbated roadblocks in the global just-in-time supply chain. . The stock market went record after record and wages were rising, but a skyrocketing cost of living threatened to dampen or even overshadow the good news – and though jobs remain plentiful, countless numbers of workers remained. on the sidelines, reluctant or unable to re-enter the labor market.

The year began with the promise of an end to the pandemic with the approval of highly effective vaccines.

“We came into the year with a sort of… this euphoria that we had from the vaccines,” said Liz Young, chief investment officer for SoFi, an online finance company. Early expectations were that the government could mobilize a massive vaccination rollout and Covid could be relegated to a historic footnote.

“We have seen very positive information on consumer confidence, consumer spending, GDP,” Young said. “There was a lot of optimism about the recovery of the economy.” But the reality – in the form of vaccine resistance and politically motivated disinformation campaigns – has collided with early public health ambitions.

With Americans ready to spend but without enough goods or workers available to meet growing demand, prices started to soar, first for very specific products like computer chips and wood, and then for everything. .

“Now we have this weird problem of high inflation and a stuck labor market, and that’s what happened the rest of the year,” Young said.

Brad McMillan, director of investment for the Commonwealth Financial Network, said it is still unclear how and to what extent the spread of the omicron variant of the coronavirus will affect or inhibit economic activity, but he asserted that companies are better prepared today to manage the future coronavirus. curved balls. “Obviously we’ve had several waves this year,” he said.

“Once it all reopened, we learned that we can have tremendous growth,” he said. “Looking back, we learned that the economy can continue to function… despite the pandemic.”

Strong demand was the biggest economic success, but it also came with a darker setback in the form of higher prices for rental of refrigerators at restaurant meals. Economists, and even the Federal Reserve’s monetary policy makers, had to reconsider their expectations of when inflation would subside. It wasn’t until the last two months of the year that Fed Chairman Jerome Powell stepped back from the stance that such price spikes were “transient.”

“The two big things for 2021 were inflation and the labor shortage,” said Dan North, senior economist at Euler Hermes North America. North said American consumers have reaped the benefits of globalization in the form of low prices for a growing range of imported goods. “Over the past few decades, the United States has been exposed to countries where the wage rate was very, very low. This is what kept inflation low, ”he said.

Covid threw a wrench into the finely tuned machine: The combination of repeated closures across Asia, port bottlenecks and shortages of all kinds of goods and components have turned the US advantage into a handicap.

“When you add in supply chain disruptions, of course it makes it worse,” North said. Added to this was soaring energy prices, which pushed inflationary pressures into almost every crevice in business and industry.

From an investment perspective, it was a pretty perfect year.

Another costly barrier for businesses was the poor improvement in the labor force participation rate, even as the number of unemployed improved faster than many had expected. With record numbers of people leaving their jobs and a gap of millions of workers between the number of jobs available and the number of applicants willing to accept them, companies have had to raise wages to attract and retain talent. After years of growth below the 3.5-4% rate economists consider optimal for economic expansion, the rapid rise in wages meant U.S. companies were paying more for extra labor costs. rising costs of equipment, materials and other inputs.

And yet, despite some bouts of volatility, stocks have skyrocketed in defiance of the looming threat posed by rising inflation. “From an investment perspective, this has been a pretty perfect year,” said Eric Diton, President and CEO of The Wealth Alliance.

While earnings certainly contributed to bullish sentiment, technical factors and monetary policy also fueled the large influx of money on Wall Street, Diton said.

“With corporate profits rising sharply, buying bonds on the Fed’s open market and keeping rates insanely low, there was no choice but stocks. Stocks – and US stocks in particular – have had a tremendous year as a response, ”he said.

Young suggested, however, that the party might be over. “The euphoria can only last so long,” she said. “We have come to the end of the year and I think reality has struck in the sense that the stock market has been on this runaway tear, the reality of the situation is that there are cracks in the economic pavement. . “

The latest inflation projections indicate that the rise in prices is likely to persist at least until the first half of 2022, in a climate of tighter monetary policy rather than the ultra-accommodative position that the Fed adopted in March 2020 and to which she remained engaged until recently, Young said. . “We are not going to be in an environment of unlimited liquidity,” she said. “Reviews matter more. “


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