The Economy

To help businesses plan for the future, Umpqua Bank worked with economic experts to get their take on key trends and predictions for the year ahead. We also had our own leaders weigh in on how small and mid-sized businesses in the West can use this information to better position themselves.

Jump to: Pandemic Pressure · Inflation’s Influence

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Abbey Creek Vineyard

Pandemic Pressure

The pandemic remains the dominant force in determining the economy’s path. While the pandemic appears to be waning, it is not yet over.

“We cannot be sure the direction of the pandemic as the virus may mutate in a worse way,” said economist Bill Conerly.

However, experts agreed that when consumers feel more comfortable and confident, which is tied closely to the pandemic, they will likely resume spending at an accelerated rate.

Conerly anticipates spending will be strong in 2022. Consumers have paid down debt and built up their bank balances during the pandemic. Now, they will shift away from the spending on goods that dominated the past two years toward service-related spending, such as restaurant meals, travel, and concerts as they are able to get out more.

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What will determine the speed of economic growth and recovery is when consumers stop seeing COVID-19 as an existential threat, said economic analysis firm ECONorthwest. They say evidence shows this is already starting to happen.

While the virus may still be with us in 2022, death rates are on the decline and vaccination opportunities are increasing. It’s probable people will be more likely to return to normal routines in the coming year, said ECONorthwest. Once they do, they anticipate the recovery in the economy will accelerate, possibly dramatically.

Federal Reserve data shows that Americans’ net worth has soared during the pandemic, thanks to relief packages, increased wages, and a hot real estate market. Net worth jumped from $117 trillion at the end of 2019 to a record $142 trillion as of the second quarter of 2021. That has left many consumers feeling flush and experts anticipate they are ready to spend.

“Businesses need to be ready for this, especially those in the service sector,” ECONorthwest said.

Inflation’s Influence

Inflation, which has been on the rise, will be a key factor influencing spending and the economy in 2022. Experts agree that inflation appears unlikely to ease in the year ahead.

“It (inflation) is serious, but not as serious as some alarmists think,” said ECONorthwest.

They point to the government’s pandemic reactions as a major driver. The government’s relief packages and the Federal Reserve’s monetary policies helped the country avoid economic calamity. But, together, they lead to excess cash into the economy. That excess cash stimulates inflation.

ECONorthwest anticipates the Fed will have to taper soon, which means it will reduce its stimulus efforts. Most notably, it will reduce its bond purchases, which began during the pandemic-induced recession and are intended to lower longer-term interest rates and bolster the economy. In turn, that tapering would lessen the amount of money in the economy. They also anticipate the Fed would raise short-term interest rates in the year ahead.

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ECONorthwest anticipates less inflation in 2022 but levels will still be troublingly high for businesses that rely on purchased services.

Conerly estimates inflation will remain high for the next two years. The increase in spending, triggered by consumer and business stimulus, has outstripped possible supply for goods and services. The Fed, Conerly believes, will continue to try to keep the economy humming and will not want to risk any moves that would stifle job opportunities. He expects it will push interest rates up in mid-2022

However, ECONorthwest points out that the Fed alone cannot control inflation; it’s a global phenomenon that relies on demand from around the globe and other central banks.

It said inflation will migrate toward services as consumers increase demand and employees will require higher compensation.

Key Takeaways

Prep for a demand in services, including building a good team.
Companies facing higher costs should consider price increases to maintain profit margins.
Do not assume liquidity and interest rates will be as favorable tomorrow as they are today. Plan accordingly.
The changes in the economy will favor those that are more agile, consider what you need to do to meet consumer demand.

Connect with an Umpqua banker to learn how we can help position your business for the future

Umpqua Bank works closely with its clients to truly understand their businesses and provide the best financial solutions for their needs. We have the market and financial expertise to help you prepare for whatever the future holds. If you’d like to talk with one of our bankers, fill out the form.