The U.S. market is once again nearing full employment, but high oil and gasoline prices, rising inflation, labor shortages and a malfunctioning supply chain threaten the economic recovery — and that was before Russia invaded Ukraine, according to the latest U.S. Forecast from UCF’s Institute for Economic Forecasting.

“The layer cake of economic problems we currently face was baked via COVID-19 policies …Vladimir Putin just put the icing on the cake.”

–Sean Snaith, director, Institute for Economic Forecasting

“The layer cake of economic problems we currently face was baked via COVID-19 policies,” says Sean Snaith, a national economist and the director of the Institute for Economic Forecasting, within the Winter 2022 U.S. Forecast. “Vladimir Putin just put the icing on the cake. High oil and gasoline prices are tied to COVID-19 policies that drove down demand during the lockdowns and led to a decrease in production. Russia’s invasion of Ukraine only served to speed up price increases that were long underway.”

Before the start of the war in Ukraine, consumer price inflation was approaching 8%, fewer people were returning to work, and consumers were encountering product shortages, manufacturing delays and rising prices. Snaith says the war, ensuing sanctions and rise in uncertainty will impact global trade, but since Russia is a minor trading partner with the U.S., the direct effects of any restriction in trade will be relatively small.

During the COVID-19-induced recession, the Federal Reserve cut interest rates to near zero, and the Fed’s balance sheet has grown to $8.9 trillion. Snaith says the Fed must quickly shift into inflation fighting mode and rapid interest rate hikes are expected. The U.S. economy, as measured by real gross domestic product, was -3.4% in 2020 but accelerated to 5.7% in 2021. It is expected to ease to 3.5% in 2022 and 2.7% in 2023 and 2024 before dropping to 2.5% in 2025. The risks to this outlook continue to rise, Snaith warns.

“U.S. consumers provided the muscle that powered the recovery, but high gas prices and overall inflation are eroding their purchasing power and weakening this important economic driver,” Snaith says.

Real consumption spending accelerated to 7.9% in 2021 but will ease to 3 % in 2022, then to 2.7% in 2023 before leveling off at 3%t in 2024 and 2025.

Payroll job growth was 2.8% in 2021, and it will be followed by 3.6% in 2022, 1.5% in 2023, 0.8%  in 2024 and 0.6% in 2025, according to the forecast. Public health shutdowns crippled the best labor market in decades, Snaith says, and it won’t be until the third quarter of 2022 before total business payrolls recover to pre-pandemic levels. In addition, headline unemployment is expected to decline to 3.6% in 2023 before starting to rise.

The housing market remains tight with ultra-low inventories and still-low mortgage rates underpinning the sector. Housing starts rose from 1.4 million in 2020 to 1.6 million in 2021 but are expected to decelerate to 1.31 million by 2025.

The Institute for Economic Forecasting strives to provide complete, accurate and timely national, state and regional forecasts and economic analyses.

Snaith is a national expert in economics, forecasting, market sizing and economic analysis who authors quarterly reports about the state of the economy. Bloomberg News has named Snaith as one of the country’s most accurate forecasters for his predictions about the Federal Reserve’s benchmark interest rate, the Federal Funds rate.

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