Assets Under Management AUM

Kenan Institute: Five economic challenges we face in 2022 beyond COVID

RESEARCH TRIANGLE PARK – As we begin the new year, we wanted to highlight five topics, beyond the impact of COVID-19 and the associated uncertainties, that we believe businessmen and policymakers will grapple with. 2022. Throughout the year, we will focus our efforts on delivering solution-oriented analysis on these topics as well as a host of others.

Will labor shortages ease?

Despite strong demand for workers and rising wages, the U.S. workforce is still 3.5 million people smaller than it was before the COVID-19 pandemic. Meanwhile, there are 10.6 million job vacancies, 3 million more than the record set at the end of 2018. While the number of people leaving their jobs has increased (as shown in Figure 1 below). below), this trend does not take into account all vacancies. To what extent does this shortage of jobs reflect babysitting needs and COVID-19 concerns that will hopefully abate, get people back into the workforce? Or is there a permanent change in people’s work choices?

Graph 1

What are the risks of a wage-price spiral?

Inflation hit its highest level in almost 40 years, with headline prices up 6.8% from a year ago. To date, the majority of the recovery is the result of rising prices for goods (red line in Chart 2), which are reinforced by demand and supply shortages due to COVID. The risk is that service inflation will start to accelerate as the prices of services are more dependent on labor costs. Will firms be able to offset higher wages with higher worker productivity, or are we exposed to a vicious wage and price spiral where workers and firms start to expect price increases? higher prices or higher wages? Keep an eye out for changes in unit labor costs (Chart 3) – the difference between compensation and productivity – and inflation expectations (Chart 4).

Graph 2

Graph 3

Graph 4

How much is the cost of capital likely to increase?

With the Fed now due to hike short-term interest rates in 2022, the cost of borrowing from banks and capital markets is expected to rise. The midfielder of the Federal Open Market Committee is currently forecasting three rate hikes in 2022. Whether this materializes and has an impact on long-term interest rates and capital market prices depends on the answer to the previous two questions. . How far are we from full employment? Will workers come off the sidelines, reducing wage increases and supply shortages? Is the inflation we are seeing temporary or permanent? Look at two-year Treasuries (Chart 5) to see how expectations for the Fed are developing.

Graph 5

What is your crypto strategy?

Crypto is now an institutional asset with a growing number of funds investing in crypto and related infrastructure, such as miners and trading platforms, as well as futures on the CME. At the end of the third quarter of 2021, crypto assets under management reached $ 60 billion globally (Chart 6). That number is likely significantly higher today, as the SEC only authorized trading of a crypto ETF on major markets last October. But the purpose of crypto is to be a medium of exchange – a store of value that can be used to pay for haircuts or auto insurance. Will companies start to embrace crypto broadly? Will ownership of crypto become diffuse enough to make it a unit of account, where companies set prices for crypto? Will traditional payment systems support these crypto transactions? Will central banks issue government backed cryptocurrencies, thereby reducing the value of private cryptocurrencies?

Graph 6

Is stakeholder capitalism the solution?

Stakeholder capitalism is the idea that companies improve societal outcomes by focusing on a broader mandate than one that benefits shareholders alone. While this sounds like a great idea in principle, it is difficult to implement in practice, especially when the interests of different stakeholders collide and override win-win solutions. During 2022, the Kenan Institute will explore the various facets of stakeholder capitalism through a series of Kenan Insights, webinars, events and other activities as academics and business leaders come together to discuss of the opportunities and trade-offs of this complex subject.

Graphic from the Kenan Institute

Stay tuned for more on these and many other business and policy topics.

(C) Kenan Institute of Private Enterprise