Q4 Focus

Outlook on the Economy

Q4 Focus

Outlook on the Economy

Horizon Investments’ preferred way of viewing the state of the U.S. economy – through the lens of supply and demand as a determinant of economic activity – has been helpful as the country migrated from a government stimulus-driven rebound to a consumer spending-led recovery in the second half of last year.

It has prevented us from becoming too optimistic or too pessimistic as the waning months of 2021 ushered in another rollercoaster news cycle. It featured still-snarled supply chains, the “Great Resignation,” scorching inflation readings, a new Covid variant, and a Federal Reserve pivot that opened the door to interest rate hikes.

Supply vs. Demand: The Mismatch Rolls On
Our expectations have been dashed that supply and demand would be more balanced by now. Demand remains strong while supplies – whether that’s workers, homes, automobiles, or energy – struggle to keep up.

The mismatch has been an important driver of the recent high readings on inflation. We suspect that will continue for the foreseeable future. But we also expect a rebalancing of supply and demand to become more apparent as the year unfolds, which could bring some inflation relief. 

After all, goods demand is still running well above pre-pandemic times – as seen in the chart below – and that, we believe, cannot continue indefinitely. Meanwhile, supply, even if it’s constrained at the moment, will eventually come back.

We are watching these areas for indications of improvement:

  • Demand/spending patterns shifting towards services and away from goods
  • Improvement in supply dynamics (backlogs vs inventories)
  • How global economic growth responds to reduced fiscal spending from governments
  • How global economies respond to the monetary tightening cycle in Emerging Market countries (which has been going on for a year) and the Developed Market monetary tightening cycle (which is just beginning)

2022: Unwinding of Crisis Stimulus Spending
Among the reasons why we expect supply-demand normalization is that it’s unlikely the multiple trillions of dollars in pandemic stimulus injected into the U.S. economy in 2021, from both the federal government and the Federal Reserve, will be repeated this year.

The Federal Reserve, under pressure to address rising prices and a strong labor market, is in the process of completely winding down its bond-buying program. And the Build Back Better spending bill in Congress appears to be stalled amid concerns it could stoke inflation and increase the federal deficit.

Also a driving force towards normalization is a political change towards the virus. Draconian responses are less popular with politicians. Instead, they’re promulgating policies aimed at balancing the need to slow the disease’s spread with the need to keep their economies up and running. The upshot of such policies is that they should foster continued healing in the global supply chain and hopefully convince more consumers to abandon their lockdown mindset and shift their spending to restaurants, theaters, and other forms of entertainment.

2022: Slower Real GDP Growth
With less stimulus – both here and abroad – economists are projecting slower GDP growth this year compared to 2021. However, 2022’s economic growth should still be running at a healthy clip compared to the years leading up to the pandemic. Currently, a recession seems a long way off.

Growth Recovery

As 2022 unfolds, it’s important to frame the news within the fact that we are living in a truly unique time, economically speaking. Never before has a U.S. rebound been so sharp from a deep recession. We will likely be feeling for many months the aftershocks of the trillions spent on stimulus, and the resulting mismatches between supply and demand. There could be multiple economic setbacks side-by-side with many improvements as everyone works their way out of this unusual situation.

Still, we expect any negative developments to happen against the backdrop of overall progress towards more normal conditions. We remain confident that people and businesses around the world are ready to turn the page on the pandemic. And as they do, uncertainty could drop, anxiety could ease, and everyday living could more fully return to what we were accustomed to before Covid.

The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Opinions referenced are as of the date of publication and may not necessarily come to pass. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. Horizon Investments is not soliciting any action based on this document. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. Information has been obtained from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Horizon Investments, the Horizon H, and Gain Protect Spend are registered trademarks of Horizon Investments.

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© 2022 Horizon Investments, LLC.
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