At the onset of the pandemic, the economic outlook was uncertain, due to a fluid environment with many moving parts. During the latest COVID-19 Update webinar, Zonda chief economist Ali Wolf says the state of the current economy “feels a bit similar,” but with many different moving parts than two years ago. The humanitarian crisis in Ukraine, high levels of inflation, Federal Reserve policy, a volatile stock market, and increasing mortgage rates have impacted the economy and caused it to deviate from many projections from earlier in the year.
“We are at a 40-year high with inflation. The hope was that as this year progressed the supply chain was going to get a little bit better, and we would see downward pressure on pricing,” Wolf says. “This is where black swans—things you can’t forecast—come into play. The geopolitical tensions that we are seeing with Russia and Ukraine are putting some additional inflationary pressures on us, and that’s making forecasting inflation a little bit harder than we initially thought.”
While Wolf shared in the January COVID-19 update that leading economists forecast inflation ranging between 2.7% and 7.5% in 2022, the Consumer Price Index and Personal Consumption Expenditure indices show current inflation is between 6.5% and 8%. Inflationary pressures are only going stronger after sanctions against Russia have caused oil prices to rise. Products with oil as an input to production have experienced price increases, and rising gas prices are having a disproportionate impact on the discretionary spending of low-income individuals, according to Wolf.
“Our housing industry has been so lucky that we have the work-from-home [environment] and people are willing to move farther away because that’s where the land and lots are and that’s where [builders] can provide homes, but, if oil prices stay high, will people continue to be willing to move farther away? It’s not that oil prices are up or going through this temporary shock, it’s how high do oil prices go and how long do they stay [high],” Wolf says. “If they go high and stay there long, that’s when you see more demand destruction, [and] that’s when you start to see some more permanent changes or some lifestyle changes.”
The Federal Reserve, in an effort to combat the high records of inflation and help the economy return to more “sustainable” and “healthy” levels, enacted the first of many planned short-term interest rate increases in March. After the 25-basis point increase, the Federal Reserve says six more short-term rate increases are likely before the end of the calendar year. Wolf says the actions by the Federal Reserve, while attempting to cool the economy, could have the unintended effect of bringing on a recession, called a hard landing.
“The Federal Reserve does not want a hard landing, they do not want a recession. But they are raising these short-term interest rates—and data can be lagged. So they’re raising interest rates and trying to see if it slows the economy, and sometimes they don’t know the answer and they may overdo it,” Wolf says. “Hard landings, historically, are more likely than a soft landing [where rate hikes directly contribute to market normalization and a healthy economy].”
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