The Post-Pandemic Boom Will Have a Sequel in 2022
(Bloomberg Opinion) -- Economic data from the past couple of months points to higher inflation and less economic growth in the short term because of supply-chain bottlenecks and product outages that companies are scrambling to fix. While that’s frustrating to consumers and companies, there’s a silver lining: It's brightening the outlook for economic growth in 2022, when companies will have had time to catch up.
My guess is the Federal Reserve's real economic growth forecast of 3.3% for next year is probably too low, meaning 2022 might feel more like a sustainable boom than the start-and-stop growth we seem to be getting in 2021.
Nowhere is this more apparent than in the housing market. Both housing starts and new home sales came in below expectations in April largely because of material shortages and a lack of inventory to meet demand. The luxury homebuilder Toll Brothers said on its earnings call on Wednesday that it's delaying putting new homes for sale until they're 50% built, in part so that they don't commit to a price only to have their costs explode while they're in the process of building the home.
Ali Wolf, the chief economist at Zonda, noted that homebuilders say their pipeline of undeveloped lots will be most limited in the second half of 2021 before expanding in 2022. That suggests estimates for housing activity might be too high for the rest of 2021 — but that just pushes sales into next year. For the first time this month, we're also seeing signs that buyers are content to wait a little rather than continue to pay soaring prices in a hot market.
The same types of dynamics are happening in the auto industry, which remains constrained by a shortage of semiconductors. The ratio of inventories to sales for automobiles hit a record low in March, as buyers have snapped up all the new vehicles they can while manufacturers try to get the semiconductors they need to produce more. Used-vehicle prices have continued to surge through the middle of May, suggesting that conditions have not yet eased. Automakers are going to sell fewer vehicles in the second quarter than they would if they had the vehicles to sell, but just like with housing, all this means is that those vehicles will be sold later, whether it's in the second half of 2021 or sometime in 2022.
While we have the most granular data for housing and autos, there's good reason to believe this is an economy-wide dynamic. In the first quarter of 2021, low inventories trimmed 2.6% from real economic growth. Depending upon how long it takes supply chains to ramp up and how long demand stays robust, it could take until 2022 for industries to have time to restock their shelves. There might even be a bit of an overcorrection, where companies scarred from having multiple quarters of supply-chain problems decide to keep more inventory on hand than they did before the pandemic — at least for key components that might be harder to source than others.
This should shift our thinking on the economic boom that we thought would be a yearlong 2021 story. Real economic growth was 6.4% at an annualized rate in the first quarter, and the data we've received so far suggest the second quarter is running a bit better than that. It's possible the second half of this year could come in a lot lower as the effects from stimulus checks and reopening fade, and to the extent some industries like housing and autos run out of product to sell. It would still mean a strong year for economic growth, but more inconsistent with the transitory inflation we're experiencing now.
It all leads to stronger growth in 2022 than the consensus forecast. Supply-chain issues will be resolved, companies will rebuild inventories and perhaps return to investing for the future as the pandemic fades. Sustaining above-trend growth without the kinds of headaches we're dealing with now could even make 2022 feel better than 2021 on a psychological level.
To someone trying to buy a home or an automobile today, this might be cold comfort, but for investors, economists and policy makers, pushing the boom into 2022 means that the current strong economic conditions should last longer than people think.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.
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