Savannah Chamber

12 6 governments were massive. Many state and local governments recognize that recent revenue gains are unlikely to be repeated and therefore will direct revenue surpluses to one-time uses, such as construction projects, rather than to continuing obligations such as hiring permanent staff. Construction spending by local governments probably will increase faster than such spending by state governments due to local governments' high reliance on property taxes. Courtesy of the housing boom, many local governments' property tax digests are soaring and will continue to do so; nonresidential property tax digests probably will not. Sales tax collections will support higher construction outlays by state and local governments. Spending on both durable and nondurable goods will exceed pre-pandemic levels, partially because consumers will spend a smaller proportion of their income on services. Unlike most retail goods, many services purchased by households are not subject to sales taxes. Thus, the reallocation of consumers' expenditures from services towards goods favors sales tax collections. Spending for Equipment The pandemic accelerated several tech-centric trends ranging from remote work, to online shopping, mobile banking, telemedicine, and video conferencing. These developments will boost spending for equipment and intellectual property and will probably make such spending slightly less cyclical than in the past. The accelerated adoption of many existing technologies, growth of end markets, tight labor markets, and competitive pressures means that businesses' spending for equipment and intellectual property will climb by about 7 percent in 2022. That percentage increase could be even larger should trade tensions loosen appreciably. Another positive development for businesses' spending for equipment and software is that many small businesses have formed. In addition, recent increases in home equity due to surging home prices will support higher spending for equipment and software by these startups. One potentially negative development is that many companies took on a lot of debt during the pandemic. Low interest rates as well as the necessity to raise cash to survive the shutdown were responsible for much of the increase in corporate debt. Companies refinanced older debt to lower interest expenses and push out debt maturities, but bond issuance often exceeded the amount of debt retired. U.S. corporate bond issuance is at record levels relative to the size of the economy. Looking ahead, corporate deleveraging could reduce funds available for investment spending, but many companies are sitting on large accumulations of cash which could simultaneously allow for higher investment spending and deleveraging. Additional downside risks include lower stock prices, an escalation of the trade war, higher corporate taxes, and turmoil in the financial markets. Corporate Profits Corporate profits rose substantially in 2021and will climb by at least 3 percent in 2022. To a considerable extent, the expectation of a more modest gain reflects higher costs for labor and materials as well as more difficult comparisons to profits reported for the previous year. In 2021, corporate profits not only fully recovered, but surpassed pre-pandemic levels. The forecast for 4 percent inflation-adjusted GDP growth bodes well for domestically generated corporate profits. Businesses' pricing power will be fairly strong so many companies will be able to push through price increases to offset higher wages and raw materials costs. Strong growth in final demand and lingering shortages will help ensure that the price increases stick. Low interest rates will support profit margins, especially for debt-heavy and capital-intensive businesses. Expense management and more broad-based growth in demand for goods and services will support profits. Cash flow will be good, and financing should still be inexpensive and reasonably easy to obtain.

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