Savannah Chamber

13 7 Some high-contact industries that are taking a long time to recover from Covid will return to profitability in 2022, or at least post smaller losses. That will boost overall U.S. corporate profits. Air transportation, the cruise industry, live entertainment, and business travel are examples of industries where profits should be much higher in 2022 than in 2021. On the minus side, tight labor markets will push up unit labor costs, which will be a headwind for corporate profits. Other headwinds include supply constraints and less efficient supply chains. Trade tensions and slower economic recoveries from Covid in the EU and other developed economies will limit overseas earnings growth. In addition, past appreciation of the dollar will make it expensive for companies to convert earnings in foreign markets to dollars. The dollar's value will moderate only slightly in 2022, which will not provide much help to profit growth based on overseas earnings. Also, financial institutions' profit margins will continue to be constrained by a flatter than normal yield curve. International Trade Typically, the strength of international trade mirrors the strength of the global economy. In 2022, international trade will grow due to the broadening of the global economic recovery to include more developed and developing countries. U.S. GDP growth will continue to outpace foreign GDP growth, but the gap will narrow. The convergence of growth rates is a positive sign for exports, but real imports will continue to grow faster than real exports. Still, both will increase. Imports and exports of goods will grow more than twice as fast as imports and exports of services, reflecting the lingering effects of the pandemic. The 2022 trade gap will be larger than in 2021, measured in both absolute terms and as a percent of GDP. Uncertainty about Covid-19 as well as U.S. trade policy adds some risk to the 2022 forecast for international trade, but less so than in 2021. The baseline forecast assumes that the U.S.-led trade war does not escalate, but it also assumes that trade tensions remain high and that tariffs remain in place. Protectionist trade policies will become more prevalent domestically and globally, which is bad for trade. The main obstacles to faster U.S. export growth are lingering effects of the pandemic, the trade war (protectionist trade policies), and past appreciation of the dollar. In 2022, the dollar's value will be quite high, which limits prospects for U.S. exports. The dollar probably will depreciate slightly, but it will be minor compared to the appreciation that has recently occurred. Inflation and Monetary Policy Consumer price inflation will increase by 3.4 percent in 2022, which is below the 4.2 percent rate estimated for 2021, but above the Federal Reserve's preferred average rate of 2 percent. The main reason why is that some of the factors that increased inflation in 2021 were transitory and will diminish. For example, the reopening of the economy allowed many businesses to raise prices that dropped during the pandemic (e.g., admissions tickets, airfares, auto rentals, and lodging). Similarly, prices for some products got bid up due to temporary demand and supply imbalances (e.g., new and used cars). Another reason why inflation will moderate is that we expect faster productivity growth due to faster adoption of existing technologies and other factors. But not all the inflation-causing factors causing are transitory. Some supply-side constraints will persist into 2022 and beyond. Labor markets will remain tight. Because it takes a long time to bring additional semiconductor chip manufacturing capacity online, computer chips will be more expensive and will remain in short supply. There aren't enough homes to meet demand, so higher home prices and rents will exert substantial upwards pressure on inflation for several years. In our view, most of the push to inflation from higher home prices has yet to show up in the official inflation estimates.

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