Economic Review and Outlook in Q&A with First Trust Advisors

Economist Bryce Gill Contributes Thoughts on Economy, Housing

MMHInsider posed a set of questions on the economy and the housing market to First Trust Advisors, and gained a series of responses that certainly are best represented if set out in their entirety. What follows is the candid Q&A between MHInsider Publisher Patrick

Revere and economist Bryce Gill.

Patrick Revere: Provide us your final impressions of 2021. Bryce Gill: I think there are two big takeaways from 2021. The first for me is the divergent recovery we have seen between different states. In my opinion, this is largely due to the severity of COVID regulations like lockdowns and school closures. The result has been huge internal migration. »

The recovery isn’t just about vaccination as the conventional wisdom thinks, it seems to have a huge cultural component based on risk tolerance. Places like Texas have seen their service industry bounce back much faster than places like New York even though the former has a much lower vaccination rate. Certain urban areas seem to be stuck on the COVID rollercoaster.

The difference in recovery is also noticeable in unemployment rates. There is a pretty strong correlation between strictness of pandemic response and higher rates of unemployment across the states.

The other big story to me is inflation completely surprising most economists with its comeback. This

is partly because most only focus on demand and not how much the actual economy is producing. Obviously, lockdowns, capacity restrictions, and loss of labor have all affected how much we produce in the U.S. However, the recent trend of blaming supply chains for all the problems seems wrong to me as well. You'd think that, by focusing on demand, it would be easy to see it coming when you compare measures like personal income versus its longer-term trend. This was obviously massively boosted by the stimulus programs from the Federal government. However, even after the stimulus checks and boosted unemployment benefits, PPP loans have rolled off, and with the U.S. still five million jobs short of pre-COVID levels, personal income remains well above the long-term trend. Clearly, this isn’t just a supply chain story. People have more money in their pockets than ever. This, along with the inability of the economy to adequately ramp up production, is what is fueling inflation.

PR: What do you see emerging in '22?

BG: The image below shows our outlook for 2022 on various measures. Overall I think the real economy will continue to improve now that Omicron has basically destroyed the narrative around government COVID restrictions. However, I do think the financial markets will be volatile as the Fed begins to normalize its pandemic-era policies. PR: What concerns you most right now? BG: Inflation remains my biggest concern. We anticipate it will moderate as long as nothing unforeseen happens. But I can’t personally think of a period when tensions around the world were so high. Obviously, there are a lot of issues surrounding our relationship with

China in the aftermath of the pandemic, and there’s widespread public unrest due to ongoing restrictions around the world. People remember the 1970s inflation as just being caused by one thing, specifically the OPEC embargo. But it was a series of things. Vietnam, the Great Society programs, ending the gold standard, OPEC… If there’s another shoe about to drop this inflation problem could be much longer-lasting. PR: What's is in store for the housing market in '22? BG: I’d expect housing to continue to do well. Demand is so high that really the big constraint is getting builders to put up enough new inventory. As labor shortages ease, construction should ramp up. Even with the Fed raising rates I think sales will still be higher than 2021, especially if we get more supply. Overall I’m very bullish on housing over the next several decades due to demographic factors with millennials finally entering the market in force. They are now the largest generation and his is a key home-buying demographic. MHV