As the year 2021 comes to an end, it would be worthwhile to take stock of the highlights of the year gone by. This is not an attempt to list every major event, focus will be limited to the US economy. It is obvious that the economy was ravaged by the pandemic for most of the year although there were signs of abatement in the later part. In a series of positive developments, the country witnessed businesses slowly starting to reopen, people finding jobs and life slowly returning to a semblance of pre-pandemic normalcy.

However, much of this has been short-lived, given new challenges and threats that could eventually bring hardships to millions, particularly the low-income segments of society. Among the many challenges three stand out. Inflation, defying all expectation of being short lived, has continued its upward spiral. Secondly the supply chain crisis is nowhere near resolution. Thirdly, the resurgence of COVID and its new variant, Omicron continue to the sap the morale of Americans at large, who desperately need a break. In essence, 2021, although infinitely better than 2020, had not ushered in the revival and cheer most expected.

The issues first.

Prices have remained high for an abnormally long period during 2021. Data published by the US Bureau of Labor Statistics (BLS) is indeed revealing. In the last twelve months, food prices saw an uptick of 6.1%. On the other hand, energy prices rose by 33.3% during the same period. Per the BLS, gasoline prices rose 58.1% since last year, the largest increase since April 1980. For instance, in the state of California, a gallon of regular gas remained higher than $4.00 per gallon since June. This has wrought untold hardships and miserable living conditions for millions of Americans.

Secondly, the unending supply chain crisis continues to put extraordinary pressure on the US economy. Although there was some improvement in reducing congestions at major ports, many experts think the US is still not out of the woods. In fact some experts think [1] the supply chain crisis could continue well into 2023. The consumer will bear the brunt and pay higher prices for food and other consumables.

Thirdly, the resurgence of COVID and the new variant Omicron have opened a new front for an already embattled economy. How quickly the variant will spread or how deadly it will be is still under cautious review by the health experts. On the other hand, there has been an alarming surge in new Covid infections. As of 29th December 2021, the seven-day average of COVID-19 cases topped 280,000 [2], almost as high as was witnessed in January. Many businesses fear that a lockdown will wipe them out.

At a time when the US economy’s post-pandemic economic recovery was at best tardy, this baneful convergence - of rising inflation, supply chain challenges, resurgence of COVID-19 and Omicron variant - is a cause for concern. 

Many businesses, large and small most likely may not survive a lockdown this time around. Given the precariousness of the economy, many experts have been cautious about prognosticating the prospects of the economy in the upcoming year.

How has the response to these challenges been?

The response to rising inflation has been tepid. According to Mohamed El-Erian [3], Chief Economic Advisor, Allianz, “the characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve and it results in a high probability of a policy mistake”. Inflation, which stood at 6.8% as of November 2021, marked the biggest 12-month move since 1982. The Fed must step in quickly to tame inflation.

One thing is clear. The US economy is in no robust health now and must tread extremely carefully in the New Year. Albeit for reasons beyond its control, America is slowly and surely losing its position as the preeminent economy in the world. Much will depend on the Biden administration’s forthright leadership as well as its ability to inspire confidence in its own decisive responses in seeing the country through. This too may prove to be a challenge.

For starters, the President’s approval ratings have been sliding for some time now. CNN [4] reported that Biden now had the lowest net economic rating for any president at this point through their first term since Jimmy Carter in 1977.

In fact, the tanking of Biden’s image had its origins in Afghanistan. The bungled withdrawal was in fact a preview of sorts for what was in store. The visuals of desperate Afghans climbing and running alongside the US Air Force plane in Kabul as well as images of few Afghans falling from the sky not only shocked Americans but also numbed the world. Biden had quickly failed his first major test.

Biden certainly has botched the Afghanistan test. But he will have no room or time for any faux pas while rescuing the US economy. It can push the economy into a deep recession. If the President’s past performance is any indication of the future, America may have really challenging times ahead.

Despite all the negativity, the American economy is a behemoth that has survived multiple train wrecks, largely because of the innovation, ingenuity, and hard work of market participants in staving off catastrophe. But nevertheless, the dangers persist and are very real.

Notes

1] https://www.foxbusiness.com/economy/us-port-delays-holidays-determine-if-supply-chain-crisis-extends-2023-says-expert

2] https://www.npr.org/2021/12/29/1068802576/us-record-new-covid-cases

3] https://www.cnbc.com/2021/12/13/el-erian-says-transitory-was-the-worst-inflation-call-in-the-history-of-the-fed.html

4] https://edition.cnn.com/2021/12/21/politics/joe-biden-jimmy-carter-economic-ratings/index.html