Key Takeaways

• 2022 GDP growth est. +1.5%, vs. +5.5% in 2021 (median forecast, 4Q/4Q)
• 2022 unemployment rate est. 3.5%, vs. 5.4% in 2021 (4Q average)
• 2022 inflation estimate 5.0%, vs. 5.0% in 2021 (Core CPI, 4Q/4Q)

Setting the Scene

Last year when we wrote this report, the debate was around whether inflation was transitory or not. That ship has sailed. Now, the debate is about identifying the peak for inflation and the slope of the trajectory back down to more normalized levels. While CPI and Core CPI are the metrics commonly looked at by markets and in the media, the Fed follows PCE when setting monetary policy. As such, we show the changes and current state of inflation across multiple measures. We note that to return to historical levels inflation would have to come down by (pps change versus three-year pre COVID average): CPI 6.1, Core CPI 4.0, and PCE 4.5. Whatever metric you chose to analyze, the move back to normal will be significant move. Many economists believe that – if we have reached the peak – the move down will be gradual.

How did we get here? The path to the heightened inflation can be broken out into phases:

• Economic reopening – In the spring of 2021, as people were vaccinated and began returning to normal social activities, demand outstripped supply.
• Supply chain issues – During the summer of 2021, the supply chain issues dominated the inflation headlines, ranging from labor shortages to delays at the Ports of Los Angeles/Long Beach (LA/LB, representing ~40% of all containers coming in/out of the US).
• Russia/Ukraine conflict – In February 2022, Russia invaded Ukraine, adding further inflationary pressures, particularly on energy and food.

Where are we now? The current state of inflation is now being monitored on three levels. There are multiple drivers for each, with varying upward and downward pressures:

• Demand –
  • With excess savings stored up and less sensitivity to rising rates given a heavier reliance on fixed rate debt, the consumer could keep spending. However, with high gas and food prices and broad-based inflation, the consumer could slow down spending.
  • Tight housing supply and rising mortgage rates weigh on housing affordability and could slow down purchases.
  • The buildup in retail inventories could drive future goods markdowns. This is occurring as the consumer has shifted the majority of purchases to services over goods.
• Supply –
  • Supply chain issues had been recovering in some areas. The recent BofA Truck Shipper Survey Demand Indicator fell 30% Y/Y, the fourth largest year-year decline in the survey’s history (began July 2012) and has fallen in 6 consecutive surveys. The Capacity Indicator (shippers ability to obtain capacity), jumped to 74 from 37 two months ago, its highest level since May 2020 (depths of lockdowns).
  • The Port of LA/LB backlog is down to 41 ships in queue + dock (vs. 46 last week), with 25 in queue (31 last week). This is well off the peak of over 100 ships seen last year.
  • China’s zero-COVID policy related lockdowns continue to add to supply chain pressures. At last measure of goods to the U.S., China’s volumes were down 1% in total, while Shanghai was down 25%. These unscheduled lockdowns and the corresponding supply chain disruptions will remain a wild card.
• Wages –
  • The sticky wage theory notes that wages respond slowly to labor conditions and changes in the economy or company performance. In other markets, prices are determined by supply and demand. Wages, however, tend to remain above equilibrium as employees resist wage cuts.
  • The labor market remains tight. While the pace of job growth looks to moderate, the labor force participation rate should recover (62.2% in April versus an average of 62.9% for the three years prior to COVID), offsetting the former.
  • Wage growth remains high but the pace could begin to slow (or has based on the tail end of the chart below). The Atlanta Fed wage growth tracker shows it at 6% as of April, versus an average of 3.5% for the three years prior to COVID.

1H22 Survey Results Summary

Over two years past the start of the COVID pandemic, concerns have shifted away from COVID to inflation. As inflation continues to climb – +8.2% for April – we have two main questions for the economy:

• Has inflation peaked?
• How long could it take to get back down to historical levels (~2%)?

We asked our Roundtable of economists to provide their best assessment of the current environment and when we can an end to inflation. We also compare answers to our December 2021 survey to gauge changes in estimates of the economic outlook. We highlight the following from the survey:

Economic Forecasts

• Unemployment rate forecasted to end 2022 at +3.5%, and remaining at +3.5% in 2023 (4Q average)
• 2022 GDP growth expected at +1.5% (median forecast, 4Q/4Q); 2023 expected at +1.7%
• 100% of economists expect the long-term potential GDP growth rate of 1.5-2%, with 73% stating this is unchanged from pre-COVID estimates
• The main factors impacting economic growth include: inflation, U.S. monetary policy, and tight labor market for both 2022 and 2023

Inflation Forecasts

• 2022 CPI – expectation +6.3% (2021 actual +6.7%)
• 2022 Core CPI – expectation +5.0% (2021 actual +5.0%)
• 93% of respondents believe the Fed waited too long to raise rates, allowing inflation to get out of control
• 93% of respondents believe we are at peak inflation levels (in terms of PCE)
• 33% of respondents expect inflation will begin to noticeably decline back down towards the Fed’s preferred 2% target by 1H24, followed by 27% replying 2H23
• 64% of respondents expect a 15-25% probability the U.S. will experience structurally higher inflation over the longer run (defined as longer than three years from now), followed by 14% responding 0-15% and 25-50% each
• 56% of respondents believe inflation is largely a supply driven problem and 44% demand driven
• 53% of respondents believe the massive expansion of the government’s balance sheet (fiscal spending >$7 trillion) poses a significant upside risk to inflation
• 80% of Roundtable economists see the greater long-term risk to the economy as stagflation, followed by 13% replying deflation

Life After COVID-19

• 63% of respondents expect the labor force participation rate not to return to the ~63% pre-COVID average until beyond 2023, with another 25% responding never
• Top factors leading to the labor supply gap include: the Great Retirement (69% of respondents) and childcare issues (50%)
• All respondents expect employees never to return to the office at pre-COVID levels, indicating hybrid work is here to stay
• The key factors listed by respondents limiting a large-scale return to office include: choose to continue working at home, not want to commute/time freed up from not commuting, and childcare issues
• Despite the emergence of the latest B2 variant, 56% of Roundtable economists believe consumers are returning to pre-COVID behaviors because of fatigue/frustration with earlier COVID policies while 38% believe the vaccination rates/vaccine availability is the driver
• In terms of approaching high-density activities, 69% of Roundtable economists expect them to return to pre-COVID norms while 25% expect them at increased but nowhere near pre-COVID levels
• When gauging long lasting or permanent negative impacts from changed behaviors on the heavily COVID-impacted activities, 82% of respondents selected movie theatres, followed by 55% indicating public transportation and 36% hotels, airlines and plays/musicals
• 70% of respondents believe proof of vaccination should be required for crowded events followed by return to offices (60% of respondents)
• After states removed their general mask mandates for public spaces, some cities maintain mask requirements for public transportation. 62% of respondents believe the remaining cities will remove the latest safety protocols in 2H22 while 15% believe 1H22
• 93% of respondents believe the Biden administration’s appeal of the removal of federal mask requirements on planes and other public transportation will not be successful
• 57% of Roundtable economists believe the development of the Merck and Pfizer antiviral pills will somewhat help accelerate the return to normal

Fed Actions

• All respondents expect the Fed to raise the target Federal Funds rate by 50 bps in June
• 54% of respondents expect the Fed to raise the target Federal Funds rate by <200 bps by year end, followed by 38% expecting a 200 bps hike
• 29% of respondents expect the peak target Federal Funds rate to be 250-300 bps, followed by 24% expecting 300-350 bps and 350-400 bps each
• 59% of respondents expect the peak rate to be reached by end of 2023, followed by 24% responding end 2022
• As to the efficiency of the Fed’s communication with markets around its timeline for monetary policy adjustments, 60% of respondents indicated it is excellent/very clear, while 40% said murky but decipherable

Fiscal Stimulus and Tax Policy

• 71% of respondents believe sustained higher inflation will deter further fiscal spending packages
• 38% of respondents expect the $1 trillion infrastructure package not to impact 2022 GDP estimates while 23% expect an increase by 0-10 bps and 10-20 bps each
• 67% of respondents view the bigger risk to the economy is the government doing too much, therefore the economy overheats
• When considering additional stimulus, 62% respondents indicated government should consider the debt level as it could impede long-term growth or incite further inflation, followed by 23% saying government should not be considering the debt level (debt/GDP currently over 100%)

Full Report

Continue reading for all survey results, more charts and a reference guide on the U.S. economic landscape.

 

About This Report

The SIFMA Economic Advisory Roundtable brings together Chief U.S. Economists of 27 global and regional financial institutions. This semiannual survey compiles the median economic forecast of Roundtable members, published prior to the upcoming Federal Open Market Committee (FOMC) meeting. We analyze economists’ expectations for: GDP, unemployment, inflation, interest rates, etc. We also review expectations for policy moves at the upcoming FOMC meeting and discuss key macroeconomic topics and how these factors impact monetary policy.

Note: The survey was populated between May 9 to 23.

Credits

SIFMA Economic Advisory Roundtable Chair

• Lindsey Piegza, Ph.D, Stifel Financial Corp.

SIFMA Economic Advisory Roundtable

• Ethan Harris, Bank of America-Merrill Lynch
• Michael Gapen, Barclays Capital Inc.
• Nathaniel Karp, BBVA Compass
• Mickey Levy, Berenberg
• Douglas Porter, BMO Financial Group
• Andrew Hollenhorst, Citigroup
• Nicholas Van Ness, Credit Agricole
• James Sweeney, Credit Suisse AG
• Michael Moran, Daiwa Capital Markets America, Inc.
• Peter Hooper, Deutsche Bank Securities Inc.
• Christopher Low, FTN Financial
• Jan Hatzius, Goldman Sachs & Co.
• Aneta Markowska, Jefferies & Co., Inc.
• Michael Feroli, J.P. Morgan Chase & Co.
• Mark Zandi, Moody’s Analytics, Inc.
• Ellen Zentner, Morgan Stanley & Co., Inc.
• Troy Ludtka, Natixis
• Kevin Cummins, NatWest Markets Securities, Inc.
• Lewis Alexander, Nomura Securities International, Inc.
• Carl Tannenbaum, Northern Trust
• Augustine Faucher, PNC Financial Group
• Scott J. Brown, Raymond James & Associates, Inc.
• Tom Porcelli, RBC Capital Markets, Inc.
• Stephen Gallagher, Societe Generale Corporate and Investment Banking
• Seth Carpenter, UBS Investment Bank
• Jay Bryson, Wells Fargo Securities, LLC

SIFMA

• Katie Kolchin, CFA, Director of Research
• Justyna Podziemska

Related Resources

• SIFMA News

  Press Release

  Expect a 50-bp Bump in June, Fed to Lift Federal Funds Rate by 200 bps or Less and Unwind Balance Sheet to $7 Trillion; 93% Agree the Fed Waited Too Long on Raising Rates, Leading to Increased Inflation

• The SIFMA Podcast

  A Conversation with Dr. Lindsey Piegza, Ph.D.

• SIFMA Insights

  Inflation 101

  A hot topic in markets, we take a deeper look into inflation terminology, measurement, and historical trends.

Prior Surveys

• US Economic Survey, End-Year 2021

• Report

  US Economic Survey, Mid-Year 2021