The economic outlook for 2022 and 2023 in the United States is good, though inflation will remain high and storm clouds grow in later years.
The war in Ukraine raged with uncertain outcomes while this forecast was prepared. The war will play only a small role in the American economy—unless it really turns into World War III, which doesn’t seem likely.
A reporter recently asked, “What’s the most important economic statistic for business leaders to follow in 2022?” It is not an economic statistic; it’s Covid. The best working assumption for an economic forecast is that Covid has less impact, thanks to vaccinations and past infections. Assume no more lockdowns and people will dine out, travel and go to concerts. But keep your fingers crossed, as new variants are quite possible.
Economic growth will be pushed up by past stimulus, both fiscal stimulus and monetary stimulus. No additional major stimulus will come this year, but stimulus always works with time lags. So this year’s economy is mostly driven by past stimulus.
Supply constraints limit our growth no matter how much stimulus is pushed into the economy. Look for inflation-adjusted GDP to increase by 4% this year, then a little faster 2023.
The current supply constraints will ease gradually but not go away. More workers will return to the labor force as schools re-open reliably and as stimulus payments and unemployment insurance benefits are farther in the past. Most of our supply chain problems have been labor problems, and the shipping and production issues will be slowly resolved. Optimistic is justified, but gradually, not immediately.
Inflation will remain high this year and next as our past stimulus keeps pushing prices up. Although supply problems will ease, that’s only a small portion of our inflation. Mostly, we have had way too much stimulus relative to our productive capacity. The Consumer Price Index will likely rise by 6.5% this year and 6% in 2023.
What will the Federal Reserve do? They are certainly going to tighten. Right now they only partially agree that we’ve had too much stimulus already. They continue to believe that supply chains are the major issue. But as the year goes by, they are likely to change to a belief that stimulus has been excessive.
Short-term interest rates will move up from about zero now to just under 2% by the end of 2022, with another two and a half percentage points of increase over the course of 2023. This is a much larger gain than most economists are forecasting, and much higher than the Fed’s policy-making officials expect they will have to do. But continuing high inflation will lead to changes opinions.
The Fed will also shift from keeping long-term interest rates down through their purchases of treasury bonds and mortgage-backed securities. They will start shrinking their assets, which will have a contractionary effect on economic growth. At the same time, most foreign long-term interest rates will rise slowly, as the global demand for credit increases faster than the global supply of savings. So 10-year treasury bonds will yield about 4% by the end of 2023, with home mortgage rates up to 5.5%.
That sounds scary to some, but leaves interest rates well below historical averages.
What happens beyond 2023? This is the scary part of the forecast. The Federal Reserve has a huge challenge in that their policies work with time lags. The time lag from Fed action to employment is about one year, and the time lag from action to inflation is about two years. This is a simplification, of course, with some effect coming in a quarter or two, then rising to a peak and then diminishing. But think of a short time lag to employment effects and a longer time lag to inflation.
When the Fed starts tightening, at first . . . nothing happens. There will probably be articles in newspapers saying that monetary policy no longer works—there always are. But then employment growth will slow down—but not inflation. We’ll call that stagflation. What will the Fed do then, when they have tapped the brakes but inflation is still going too fast? Will they press down harder on the brakes, or will they worry about job losses and hit the gas?
In the 1970s the Fed made repeated mistakes. They learned some lessons, but their goals are not just two percent inflation, but also good job opportunities. They like having a job market where jobs were available even to high school dropouts with prison records.
If the Fed persists with fighting inflation, we’ll be at risk of a mild recession, but inflation will be tamed. But if they fail to fight inflation now, then they will be postponing the pain, and they will have to tighten even harder when they eventually deal with inflation, likely resulting in a more severe recession.
Which course they will choose is difficult to say, but the economy is already set up for a more cyclical path. It’s like driving on an icy road. Keep the car going straight, and everything is good. But once you start swerving, it’s very hard to get back under control.
One of the things economists know from history is that economies with low inflation tend to have stable growth. But high inflation economies tend to be very cyclical.
Economic changes in high inflation and low inflation.
Dr. Bill Conerly based on data from U.S. Bureau of Economic Analysis
For example, economic growth in the decade before the pandemic varied only a little, with no recession over an entire whole decade. What would this look like in a high-inflation economy? Well, we ran that experiment in the 1970s and early 1980s, as the chart shows.
Business leaders should expect that in 2024 and beyond, the economy will be more cyclical than they have experienced over most of their careers. The booms will be boomier, and the busts will be bustier.
The near-term outlook is solid because of past stimulus, but the later years bring great risk of recessions.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
