US Economic Outlook: A delicate balancing act ahead in 2022

Topic: The rampant spread of Omicron highlights that the economic outlook continues to depend on the course of the Covid virus. There will be a delicate balance between the fallout of this rapid strain versus encouraging news that show Omicron is less severe than prior variants. Real GDP growth likely exceeded a 7% annualized pace in Q4, but consumer spending cooled in November, indicating slower spending momentum heading into Q1. Further, the rapid spread of the Omicron variant signals Q1 2022 real GDP growth is on course to be closer to 2.5%. The good news is that after the winter chill, activity should rebound, placing real GDP growth at a sturdy 4.1% pace – though this is down 0.3ppts from our December baseline forecast. We believe inflation dynamics will remain M.E.S.S.I. with inflation peaking in early 2022. Still, cooler demand, a shifting spending mix, and rebounding supply will lead to a better balance between supply and demand by mid-year allowing disinflation to take hold. The Fed faces the ultimate balancing act as it tries to quell the elevated pace of inflation without stunting the economic expansion.