Inflation, “softness” in the White House, and pandemic uncertainty make up some of the biggest risks to the U.S. economy in 2022, according to a Washington consulting firm.
“Every quarter, I take a macro look at trends driving politics and policy looking both backward and forwards and identify where key political risks may lurk and where political opportunities may present themselves,” Bruce Mehlman, former assistant secretary of Commerce in the George W. Bush administration, told the Daily Caller News Foundation. “The most recent analysis targets 2022 and identifies the emerging risks business and government leaders should anticipate and prepare for.”
A founding partner of the Washington, D.C.-based consulting firm Mehlman Castagnetti Rosen & Thomas, Mehlman advises prominent companies to understand and prepare for emerging trends and risks critical to the ever-evolving policy environment.
Mehlman’s report, “Living In Limbo: Anticipating the Top 2022 Risks In Politics and Policy,” outlined over 20 risks in politics and policy, and the Daily Caller News Foundation identified eight of the most significant concerns.
COVID: The Fourth Wave
Looking forward to the risks COVID-19 poses heading into 2022, Mehlman believes the virus won’t suddenly disappear but also won’t wipe out humanity, he explained to the DCNF.
“I am not an epidemiologist, but it feels to me that this is the best example where all expectations are either 1 or 11. You hear it either a common cold or that we will all get sick and die,” Mehlman told the DCNF.
Instead, Mehlman sees an endemic situation, comparing it to a bad flu strain that will have a new flavor each year, he explained to the DCNF.
“At some point, we need to get to accepting that it will never go away and that it is not going to kill everybody,” Mehlman told the DCNF.
“The risks are overhyped, and the preventions are under-embraced,” he told the DCNF, adding that those preventions include mass vaccinations and wearing masks when bad outbreaks occur.
COVID-19 cases continue to soar throughout the country and globe after the emergence of the Omicron variant.
Over 90 countries have reported Omicron cases, forcing some to implement new lockdown rules. Cases in the U.S. increased to over 156,000 on Friday, with the new variant now reported in 43 U.S. states, according to the Centers for Disease Control and Prevention.
The CDC said Monday the Omicron variant has become the dominant strain in the U.S., making up 73% of reported cases. While cases continue to surge, deaths have not increased at the same rate as some believe the new variant is less dangerous than previous strains.
Extreme Weather Disasters
In 2021 we saw an influx in extreme weather disasters, increasing costs, challenging supply chains, and driving policy, Mehlman explained to the DCNF.
“So far, these policies have disfavored fossil fuels, reducing investments and inventories causing severe energy inflation,” Mehlman told the DCNF.
Increased severe weather disasters pose a serious risk to insurers, Mehlman added.
“Insurers use historical data to price risk. We are increasingly seeing 500-year record floods and other disasters that are out of proportion to what was witnessed in the past,” Mehlman told the DCNF.
“These insurers are now being asked to cover things that you didn’t think would be insuring things that would be this bad because historically, they haven’t been,” Mehlman told the DCNF.
“They are now covering people who didn’t use to be in harm’s way, but as a result of changing weather disasters, they are now at risk,” Mehlman added, pointing to the recent winter freeze in Texas.
A massive ice storm hit Texas in February, leaving millions without power as the state’s power grid became ineffective after it was coated with ice. The estimated cost was over $18 million in damages, making it one of the most expensive storms for insurers on record.
Manufacturers: Supply Chains
There are short term, medium-term and long term problems facing supply chains entering 2022, Mehlman told the DCNF.
The short-term risk is the global employee, semi-conductor and energy shortages exacerbated by politics.
Medium-term challenges for supply chains are the rising theme of economic nationalism, Mehlman told the DCNF. Headwinds that made global supply chains so efficient from 1989 through 2019 are fading, posing the greatest long-term risks.
“U.S. and Chinese economies used to be tied together; now they are splitting apart. Technology used to encourage greater cross-border data flows, but now regulators are attempting to shut them down,” Mehlman told the DCNF.
Continued inflation will continue to challenge the Biden administration’s agenda, Mehlman told the DCNF.
Soaring prices will determine how the Federal Reserve pursues its monetary policy heading into 2022, how much money the government will try and spend on safety nets and infrastructure, and if the administration will continue its antitrust competition reviews, Mehlman added.
“The companies the administration plans to go after are also probably some of the most productive companies in the economy,” he told the DCNF.
Inflation has soared to its highest level in 39 years, with the Consumer Price Index jumping 0.9% in November, bringing the key inflation indicator’s year-over-year increase to 6.8%. The producer price index, which measures inflation at the wholesale level, surged 9.6% year-over-year as of November, growing at the fastest rate ever measured.
Growing inflation, along with falling unemployment, triggered the Federal Reserve to accelerate its asset purchasing stimulus while also forecasting three interest rate hikes in 2022, according to CNBC.
Markets: Irrational Exuberance
The biggest threat stock markets face in 2022 is potential financial bubbles that would persist as the Fed tightens its monetary policy, according to Mehlman’s report.
“The market is clearly out of all its historic wack,” Mehlman told the DCNF. “The fact that in the last year we saw as much money invested in equities as the last prior 19 years is not normal.”
“The fact that so many stocks are down but the biggest five to 10 are off the charts up is also very unusual,” he added.
Mehlman identified elements of a robust stock market with justified profits, but also noticed characteristics of a bubble, he told the DCNF.
Stock markets tumbled Monday as the spread of the Omicron variant triggered lockdowns in European countries. The Dow Jones Industrial Average dipped 433.28 points at the end of the trading day Monday, while the S&P 500 fell 1.1% and the Nasdaq declined 1.2%, according to CNBC.
Biden: Perceived “Softness”
President Joe Biden’s perceived “softness” will serve his political risk entering 2022, according to the report.
Mehlman pointed to Biden’s softness on the border, economy, crime, and foreign policy. As his approval rating continues to plummet, and more Americans see growing failures and weakness in the respective categories, Biden and the Democrats will have a harder time passing legislation, Mehlman explained to the DCNF.
“A president with high approval is more feared and followed legislatively. It will be harder for him to get people to do what he wants and will also be dangerous news for down-the-ballot democrats,” Mehlman told the DCNF.
Roughly 46% of respondents approved of Biden’s handling of the COVID-19 pandemic, while 48% disapproved, according to a recent CNBC survey. Biden’s economic approval also plummeted, with 37% approving and 56% disapproving.
Biden’s disapproval rating surged once again on Monday reaching 55%, according to an NPR/PBS News Hour/Marist Poll.
Multinationals: U.S.-China Decoupling
Looking at the future of U.S.-China relations, Mehlman saw a steady decoupling between the two world powers, but people shouldn’t “assume everything will catch on fire,” he told the DCNF.
“Both leaders will balance assertiveness and accommodation,” Mehlman wrote in the report. “Businesses should plan for neither detente nor war but stead decoupling with tightening restrictions.”
“Both nations need to show that they are tough, but they both want to avoid a war and a recession. Both want to challenge big tech, but they also want to remain as an innovation powerhouse,” Mehlman told the DCNF.
Brands: Employee Activism
Business leaders have seen increasing employee activism after the Trump administration and George Floyd’s murder to urge businesses to become engaged in non-traditional issues, Mehlman told the DCNF. Company leaders now have to address employees urging their employers to combat growing liberal issues or run the risk of getting “canceled.”
“We found that as business leaders begin to think about political risks, some of the risks are the politics within the office place as opposed to national politics,” Mehlman told the DCNF
“Business leaders are trying to decide when it is appropriate to weigh in on issues like voting rights, abortion, and climate change, and when to stay clear,” Mehlman added.
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