Economic Outlook

Contradictory Signals Usher in the New Year

  • GDP delivers a head fake.

  • Inflation rages ahead.
  • Robust growth still possible in 2022, but…
  • Inflation, supply chain issues, tight labor, and COVID remain significant headwinds.
Written by Philip Rich, Chief Investment Officer


US Real GDP posted a very robust, but also misleading, gain of 6.9% in the final quarter of 2021, according to the advance estimate. We say “misleading” because without a very strong inventory build, growth would have been about 2.0%. Growth for all of 2021 is now estimated at 5.7%, the strongest rate of growth in 35 years. That growth is better understood as a return toward prior trends rather than an extension of the growth achieved prior to COVID. The US is still very much an economy in recovery, catching up to where it might have been had the pandemic never occurred. The robust growth of 2021 was also a product of the most generous stimulus, both fiscal and monetary, ever directed against a recession. That stimulus is now behind us. US households accumulated $2 trillion in savings during the past two years, and those savings have driven prices higher for financial assets and real estate, but the impact the stimulus had on spending will fade in 2022. For all the strength in the inventory build, shortages abound in many parts of the economy and its supply chains. Business leaders and investors will want to pay attention to the details behind headline economic numbers during 2022, as COVID has caused distortions that our traditional economic surveys have difficulty accounting for in a single number. 

Personal consumption, normally the largest component in GDP, grew 3.3% in the fourth quarter, and services continued their recovery despite the negative impact of the Omicron variant—which will also be evident in early results for 2022. Business fixed investment rose 2%, with strong results in equipment and intellectual property. Such investment supports productivity growth, which could be an important component in addressing labor shortages. A 14.4% decline in aircraft orders impacted the broadest measures of equipment spending, but aircraft orders are “lumpy,” and other equipment spending appears to be holding up despite shortages.

2022 will be a key transitional year for the US economy. Fiscal stimulus is gone, and monetary stimulus is shifting from tailwind to headwind. The quality of this recovery will now turn on our ability to address supply chain issues and the availability of labor. If we are able to cope with those challenges, there is still plenty of upside for growth, since COVID is still impacting a large swath of economic activity, especially in the services sectors.
Source: U.S. Bureau of Economic Analysis, 


Payrolls rose a very strong 467,000 in January, surprising most analysts. Not even Omicron could mask the good news. Furthermore, hiring for the prior two months was revised upward by 709,000. Overall employment is now less than 3 million jobs below pre-COVID levels. Unemployment nudged back up to 4.0%, but for the very healthy reason that more people returned to the workforce. Labor force participation, while still not high, increased to 62.2%. If this upward move signals a trend, it will be a positive development for the economy, indicating some potential relief for very tight labor conditions.  There remain 1.73 job openings for each unemployed person in the US, higher than the highest level attained during the last expansion. The “quit” rate remains near its all-time high. Supply constraints in the labor market help explain both a productivity increase of 6.6%, annualized, and an increase in compensation costs of 6.9%. If productivity can rise in tandem with unit labor costs, the latter will not be inflationary. For now, this relationship appears tenuous but still evident in the Q4 ’21 numbers. Some of the productivity may relate to increased virtual interactions in business, less commuting, and less business travel. If so, we may already have experienced whatever productivity benefits these may provide.

Increasing productivity and a more complete return of the workforce would be positive trends that would support healthy economic growth in 2022. Increasing labor costs put additional dollars into the hands of consumers, but they also squeeze margins and contribute to inflation.

Source: U.S. Bureau of Labor Statistics,


Resurgent inflation has become one of the least welcome hallmarks of this recovery. The Consumer Price “all items” Index increased 7.5% for the 12 months ending in January, the largest increase in almost 40 years. Core CPI (less food & energy) was up 6.0%, the largest increase since 1982. The month-over-month increases appear to be decelerating slightly, but the overall level of inflation is very concerning. The cost of food, electricity, and shelter contributed the most to core inflation, but furniture, clothing, new vehicles, and medical care are also up. Energy is up 27% over the past year, and food is up 7.0%.

It is now generally accepted that the Federal Reserve will begin raising interest rates in March of this year in order to combat inflation. It remains to be seen how much of the upward pressure on prices is a product of the logistical and supply problems we are currently experiencing. However, even if we assume half of the current rate of inflation is somehow transitory, that still leaves us with a rate that exceeds the Fed’s comfort zone. 
Source: U.S. Bureau of Labor Statistics,

Interest Rates

It is now a foregone conclusion that the Fed will raise rates beginning in March. It has already begun the process of winding down its monthly bond purchases, which served to inject new liquidity into the economy by way of the banking system. The bond-buying will end in March. Many observers believe that the Fed will increase rates at every meeting of the Federal Open Markets Committee for the remainder of the year. 

The bond market is already anticipating higher rates. The yield on the 10yr Treasury Note has risen from 1.63% at the beginning of this year to just over 2.0% today. The 30-year mortgage has gone from 2.84% one year ago to 4.0% today. A policy program of steadily rising rates will make all debt and all financings more expensive. At some level, higher interest rates should dampen inflation. They can also slow down economic growth in an economy that is still struggling with the after-effects of a COVID-induced recession. It remains to be seen whether inflation or the economy reacts first. In the past, Fed tightening has been a fairly reliable predictor of recessions. It has also been a key tool for combating inflation. In the present instance, some elements of inflation may not be as responsive to higher rates as they have been in the past. Higher interest rates will not impact supply shortages caused by logistical problems.  They will not, by themselves, loosen a tight labor market. And they will not cure a supply deficit in housing. The price of oil might not be impacted by higher rates unless overall demand is hit by a downturn in the economy. It will be a very delicate balancing act by the Fed to control the current rate of inflation without plunging a fragile economy back into recession.

Source: Board of Governors of the Federal Reserve System (US),


The stock market has started 2022 with renewed volatility, much of it to the downside. At this writing, the S&P 500 is down 7.78% since the beginning of the year. Indexes that are heavier in technology, such as the NASDAQ, are down more, although it would be a mistake to infer that all technology is doing poorly in this environment. What is clear is that some of the excessive valuations visible in the market prior to the beginning of this year are being washed out. Some of those higher valuations were concentrated in high-tech stocks. The current price-earnings ratio of the S&P 500 is 25.2, still well above the long-term average of 16, but also below the ratio of 35.9 seen at the beginning of 2021. Still, many companies are reporting strong earnings and increasing their outlook for the next twelve months. S&P 500 earnings are up over 78% from their depressed state at the depth of the COVID recession, and overall earnings are ahead of what was being reported prior to COVID. However, investors are having to evaluate securities in an environment where interest rates are rising, and the very generous liquidity provided by the monetary and fiscal stimulus is being withdrawn. If the value of a security is equal to the present value of a future income stream, then increases in the applicable discount rate would produce lower valuations, all else equal. And some meaningful part of last year’s bull market was liquidity-driven.

Complicating the investment picture further is the fact that bond investors are facing a rising interest rate environment. Historically, bonds have been favored by conservative investors for their relative stability, their ability to preserve capital, and their income generation. Much of our recent history in the bond markets has been characterized by declining rates, which make fixed-income securities more valuable. In a rising rate environment, the market value of bonds goes down. Bonds still occupy a unique place in the spectrum of investments – barring default, they pay an amount certain on a date certain and that is their principal appeal to the conservative investor. However, in a rising rate environment, they lose market value and struggle to maintain purchasing power in the face of higher inflation. All is not lost for the bond investor; the impact of rising rates can be mitigated by managing duration in a portfolio, and diversified portfolios can include income-producing assets that may be less directly impacted by rising rates. These can include dividend-paying stocks, REITS, MLPs, and Business Development Corporations. The risks associated with such investments should not be confounded with a bond portfolio, but they can play a role in a broader investment strategy.

Committed bond investors should not entirely despair of this market. For many years now, bond investors have had to accept unusually low interest payments. The path to higher rates, though painful in the short term, is also the path to higher yields for bond investors. Well-structured bond portfolios typically have maturities distributed across many years, thereby producing cash flow from both coupon payments and maturities. In a rising rate environment, that cash flow can be used to reinvest at higher rates.  

Source: S&P Dow Jones Indices LLC,

As always, if we can be of assistance to you in navigating these challenges, please do not hesitate to contact us.

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Nora Bagby

Director Private Banking Sales & Service

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Ben Johnson, CFA

Senior Portfolio Manager and Client Service Manager

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Lance Hopegill, CFP

Chief Fiduciary Officer

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Adam Martin, CFA

Senior Portfolio Manager

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Philip Rich

Chief Investment Officer

This information is for informational purposes only and does not constitute investment advice.


  • GDP – Bureau of Economic Analysis
                            Employment & Inflation – Bureau of Labor Statistics
                            Interest Rates – Federal Reserve
                            P/E S&P 500 –
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