Savannah Chamber

15 9 outlook is that disagreements among OPEC+ countries could lead to a price war. For example, the United Arab Emirates probably would like to boost production well beyond its quota in order to benefit from its recent heavy investments in productive capacity. Iran has plenty of spare capacity and most certainly would like to boost production, which would lower oil prices. Productivity In the wake of most recessions, productivity increases. New businesses are started. Social distancing and remote work forced businesses to invest more in labor saving equipment and processes. Contagion fears forced businesses and their customers to use automation, digitization, and other high-tech solutions as never before. Although often lamented, the slowness of the post-pandemic matching of workers to employers probably will make the post-pandemic economy more productive. Generous unemployment benefits allowed workers to spend more time finding a better fit with employers, which should boost productivity. Plus, the labor shortages that appeared quickly as industries reopened encourage employers to use their existing workers more efficiently and to equip them with better technology and software, which boosts productivity growth. Unfortunately, not all recent developments favor faster productivity growth. For example, there will be a payback from shutting down the schools and from the forced substitution of virtual learning for face-to-face instruction. Pandemic-era students lost months of achievement. The step back from globalization, protectionist trends that favor certain industries, and onshoring to guard against supply chain disruptions will reduce U.S. productive growth. In addition, there are some long-term factors behind weak productivity growth that have not lessened and probably intensified. The federal debt increased substantially. Government has grown in size and accounts for a larger share of the overall economy than it did prior to the pandemic. We are likely to see higher overall federal tax burdens and more regulations at every level of government, which will limit productivity growth. Another problem is that slower gains in educational attainment contribute to sub-par productivity growth. We simply are not adding enough to human capital to generate average, or above average, productivity growth. Finally, the aging of the population and a less liberal immigration policy limit productivity growth. Forecast Risks The risks to our baseline outlook for sustained, above-average inflation-adjusted GDP growth in 2022 are evenly balanced, with Covid-19 as the main risk. The virus will continue to mutate and a variant that avoids vaccines could develop. Even though we believe widespread lockdowns would be avoided, contagion fears could lower confidence and slow consumer spending. Supply chain disruptions could worsen. More older workers would retire, and more prime-age workers would remain at home to care for family members, which would cause the economy to grow more slowly than we expect but would probably not cause a recession. A dramatic worsening of the pandemic, however, could lead to formal or informal lockdowns of the population and businesses, pushing the economy into recession. A large increase in long-term interest rates and/or inflation could trigger a recession through either a stock market correction or a corporate debt crisis. Stock prices are inflated and vulnerable to correction, so inflation might run much hotter than expected. In 2022, labor market conditions will strengthen further. Workers will be scarce in many occupations. The U.S. unemployment rate will soon fall to levels consistent with full employment, and then labor market conditions will begin to generate wage-push inflation. The Federal Reserve must shift to a more restrictive policy, but if it increases interest rates a lot faster than financial markets are expecting, then stock and bond prices could crater. We are concerned that inflation might gain traction because the Federal Reserve's purchases of Treasuries and mortgage-backed securities created a lot of money even as the quantity of goods and services available for sale declined. The money supply, M2, grew by 25 percent in 2020 and probably increased by at least 5 percent in 2021. The main

• Cover