A LOOK AHEAD Same direction, new headwinds

Calendar 2021 gave us months 9 to 20 of the upturn after the two-month recession of March and April 2020.

The year was marked by output that regained pre-recession peaks in mid-2021 and annual growth near 6%. Labor markets continued to recover with net monthly payrolls increasing by an average of 555,000 jobs through November. The unemployment rate fell to 4.2 percent in November, but jobs were still shy of February 2020 peak by 3.9 million. Incomes rose supported by employment and wage gains as well as additional stimmies, an expanded safety net and buoyant financial markets.

In the second half of 2021, the long slumbering issue of inflation awoke and by Thanksgiving, year over year gains in the consumer price index hit 6.8 percent. For folks under about 45, this was a new experience. (Older folks can rummage around for their Whip Inflation Now Buttons!)

“Transitory” was the first explanation-a year after the collapse in 2020 prices were going to bounce back energy, hotel rooms, airfares, etc. A shift in demand in favor of goods relative to services and production/transportation bottlenecks pushed up prices. Chip shortages sent vehicle prices — new and used — soaring, and poor harvests in parts of the world boosted ag prices.

On the policy front in 2020 and early 2021, fiscal policy focused on supporting incomes-CARES Act, the Omnibus Covid Relief Act, and the American Rescue Plan (Remember the Stimmies). Monetary policy kept rates low, and the Fed continued to buy $120 billion per month in Treasury and mortgage-backed securities. A policy mix focused on supporting activity was confronted by a supply-constrained system, a mismatch with inflationary implications.

By late 2021, labor markets were tight with more than 1.6 jobs per unemployed worker, wage growth had accelerated, and initial claims loitered near half-century lows. Inflation had risen to the top of the worry list.

The Federal Reserve, with its objectives of stable prices and high employment, had announced in August of 2020 a Flexible Average Inflation Targeting Policy. This means that after a period of below-target inflation, they would tolerate a period of above-average inflation to keep the average near the target of 2%.

The price level jump and continued gains in the labor market moved the Fed to start curtailing monthly bond purchases in November by $15 billion per month. The pace was accelerated in December and three rate increases are expected in 2022.

Fiscal policy saw an infrastructure bill passed with enhanced spending over 5 years. The larger Build Back Better plan with climate and safety net expansions has not passed. There are some inflation concerns, gimmicky finance (assuming an eternal program will go away after a year) and controversial items like an expanded SALT deduction, new benefits, and climate elements. Its fate and timing are unclear.

The delta Covid variant dampened activity in the third quarter of 2021 and at year end, the omicron strain is a threat that has resulted in shutdowns overseas and increased infections and restrictions domestically. It is a harbinger of the future as the virus becomes endemic like the flu.

Moving into 2022, one is reminded of the late Donald Rumsfeld’s “known unknowns” now including: the virus trajectory, how vigorously will the Fed react to inflation, will inflation moderate, will those who have left the labor force return, how will financial markets react to the tapering, and what will happen to Build Back Better?

There is a great deal of uncertainly. The expansion will likely continue at a 3.5-4.5% rate supported by rising incomes, strong balance sheets, low levels of inventory, strength in housing and investment. It will be dampened by labor supply and dissipating pent-up demand.

Fiscal policy will be less supportive and monetary policy will move toward restraining inflation, which will moderate as the supply chain recovers and drifts back toward 3%. The risk is that higher inflation becomes ingrained in expectations and behavior.

Idaho, which was the first state to experience year-over-year job growth after the recession, continued to grow in 2021 with employment growth of 4.1% through the first 11 months. The unemployment rate in November was at 2.6%, well below the nation’s 4.2 %.

In recession-wracked 2020, Idaho personal income increased 7.8% with a 27.5% jump in transfer payments (Fiscal Policy in Action). Income growth continues in 2021.

Residential permits in Idaho through the first 10 months of the year totaled 17,225, up 22.5% from 2020. House prices continue to rise, with Idaho appreciation ranked first in the FHFA data for the third quarter. This brings falling affordability and generational issues for the young.

All states have rising home prices, and we happen to be first. The nation’s most rapid population growth, aging millennials and still modest interest rates imply continued strength.

Coeur d'Alene mirrored the Idaho experience, but a bit stronger with a November unemployment rate of 2.5% and employment 2.7% above the previous year. The ubiquitous help wanted signs remain, and the state’s minimum wage has been left in the dust by the market.

Employment has been above February 2020 every month since June of 2020. Leisure and hospitality employment from June to September 2021 was more than 20% higher than in 2020 and well above 2019.

The FHFA House Price Index for Coeur d’Alene rose 33.67% in the year to Q3-this reflects the same houses with mortgages purchased by Fannie and Freddie. The local market was second in the nation, with Boise being first and Spokane 14th.

Permits through October in Cd'A were down 7.4% on a decline in larger multi-family projects while single-family permits increased.

It was a year of remarkable strength despite the underlying disruption, illness, and death from Covid-19. It is a pattern common to other smaller metros in the Intermountain West, as some national publications have cited.

Idaho is expected to grow at a slightly slower pace in 2022 due in part to limited labor supply, the ebbing of Federal stimulus, and the fading of the reopening boost. There were tentative signs of slowing in the late-year data.

Coeur d’Alene and the adjoining Spokane region remain desirable locations for expanding firms and individuals seeking lower costs (although the housing advantages are diminishing!) and attractive amenities. The cost of renting a moving truck to here from the Bay area was seven times higher than in the other direction, according to a national provider.

Nearly 2 years of restrained travel and a desire for experiences bodes well for a strong 2023 tourist season if labor is available.

In 2021 we had shocks from new mutations, supply chain issues, droughts and storms that remind us of the uncertainty of our times. In 2022 we will have changing policy, ongoing inflation pressures, omicron, and a diminished aging labor force.

Press contributor John W. Mitchell was a professor of economics at Boise State University for 13 years before joining U.S. Bancorp in 1983. He was Chief Economist of U.S. Bancorp until July 1998 and served as Economist Western Region for US Bank until July 2007. A resident of Coeur d'Alene, Mitchell has been making economic presentations on the nation and the region for almost 50 years.