December 2021/January 2022 — Northwood University McNair Center for the Advancement of Free-Enterprise and Entrepreneurship

Introduction

As we close the books on 2021 and move firmly into the New Year, the U.S. economy is facing strong headwinds. Gold ended 2021 – and remains – above $1,800 an ounce, West Texas Intermediate Crude (WTIC) is above $85 a barrel, and the 10-year Treasury Bond Yield at the time of this writing is 1.866%. All three indicators are signaling a continuing upward trend for inflation in 2022. Unfortunately, high inflation rates will leave the Federal Reserve Bank no choice but to increase key borrowing rates leading to higher rates in general, especially the prime rate, which is the rate banks charge their best corporate customers. A higher prime rate in 2022 is certain to put a damper on business activity, especially in the interest rate-sensitive high-tech arena.

Key December 2021/January 2022 Data

Positive and Negative Signs

Higher oil prices, coupled with inflation above 5%, will lead to higher gasoline prices by mid-summer. We believe the average U.S. gasoline price per gallon as reported by AAA will reach at least $4.25 by early summer. Higher gasoline prices will increase the burden to the average household budget, reducing a family’s ability to purchase more discretionary goods and services. Another factor slowing the U.S. economy in 2022 seems to be a decline in the “wealth effect.” The wealth effect is often described as the additional confidence consumers have, leading to purchases consumers normally would not make. The wealth effect happens when consumers realize their net wealth has increased or they suspect it will increase from gains in stocks and other investments they hold. Early 2022 economic conditions lead us to believe consumers are losing confidence in the economy and that if anything, a major stock market correction could cause a “negative wealth effect” in the first half of 2022. We believe the U.S. economy is in for a general stock market correction in 2022, even though the Conference Board reported Consumer Confidence ended 2021 on a high note at 115.8, up from 111 in November. The National Federation for Independent Business (NFIB) optimism index closed 2021 at 98.9, up .5 points as almost a quarter of its membership voiced strong concerns over business and inflation at the end of 2022. Construction received a boost in January as December housing starts came in at 1.702 million instead of the anticipated 1.65 million. Construction optimism continued as building permits for December came in at 1.873 million, well above the estimate of 1.701 million for the month. Finally, U. S. existing home sales reached a 15-year high of 6.1 million in 2021.

Current Issues

Polls and the economy – As 2022 begins, there is a lack of confidence in general public policy coming out of Washington, D.C. According to a recent poll by Quinnipiac University, President Biden’s overall job approval rating stands at 33% with 53% of Americans disapproving of the job the president is doing, and 13% having no opinion. On foreign policy, a recent Fox News poll shows that 35% of Americans approve of the job the president is doing, while 54% disapprove. A recent CBS poll reports the Biden Administration is focusing its activity on the wrong things. The CBS poll reports that 58% of Americans feel the president needs to focus more of his attention on the economy, while 65% feel he needs to pay more attention to inflation. Recent polls show well under 50% support for President Biden’s Build Back Better plan. An Associated Press poll released in December asked Americans which problems the federal government (both parties) should deal with in 2022. The three highest were the economy at 68%, COVID-19 at 33%, and the average American’s cost of living, 24%. According to a recent Gallup poll, 42% of Americans identified themselves as Democrats, while 47% identify themselves as Republicans. We would urge Republicans not to read too much into recent gains as elections are won by telling voters what you are going to do and then accomplishing it.
FED meetings in 2022 – The activity of American consumers makes up roughly 70% of U.S. GDP. We are doubtful Americans will spend at the same pace in 2022 as they did in 2021, due to rising inflation, a slowing economy, and a declining savings rate in 2021. Couple this with the fact the U.S. Federal Reserve Bank has eight meetings scheduled between Jan. 25-26 and Dec. 13-14 in which they have signaled they will raise interest rates during four of the meetings. A number of analysts now believe the FED could raise rates four to six times this year, leading to even higher interest rates, reduced consumer spending and greater slowing of the economy.
The Power of Capitalism. Hopefully, 2022 will be the end of judging people and organizations by surface characteristics, such as skin color and gender. People and organizations should be judged by their character, work ethic and the merits of their ideas. We found great comfort in the words of Black Rock (the world’s largest hedge fund with more than $10 trillion of assets under management) CEO Larry Fink’s 2022 letter to CEOs in which he said, “stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism … the fair pursuit of profit is still what animates markets.” A good message for all of us who live in a free society.

Conclusion

As we begin 2022, we realize that we have challenges galore, as well as great opportunities. America is — and hopefully always will be — the land of freedom, opportunity, the rule of law, and the world’s only military and economic superpower. As the years go by, it is getting more difficult to believe that the previous stated hope can be possible. The United States was a great economic power in the 1900’s and thus able to become a great military power, a power focused on making the world a safer, better place. The CRINK nations (China, Russia, Iran, and North Korea) are nations driven by authoritarian and Marxist ideas that wish to dominate the world militarily and economically. For decades, a weakening U.S. economy — driven by bloated and misguided government spending — has left the U.S. economy far less competitive globally in numerous areas of manufacturing and technology. It has also left the U.S. economy saddled with numerous burdensome regulations and a $30 trillion national debt, calling into question our ability to respond to military and/or economic threats from one or more CRINK nations now or in the future. Our New Year’s Resolution for 2022 is to demand of Congress that they vote for policies that will restore the American Competitive Free Enterprise System and our ability to continue to defend liberty and the rule of law here and where necessary abroad.