MainStreet Macro: What’s next for Main Street?

A new year usually signals new beginnings for people and, by extension, the businesses they sustain. While 2022 will carry forward some themes from 2021, new economic trends will redirect the path ahead.

Where will that new path lead us? Here’s what we need to know before we can answer that question.

1. What’s next for interest rates?  

Unlike my pup Lavender, the Federal Reserve dislikes being the center of attention. But that’s exactly where the central bank finds itself, with surging inflation and an incomplete jobs recovery.

Let’s put the Fed’s plight in perspective. The oldest millennial is now 40. The last time inflation was this high, at 6.8%, she was just a year old.

The point? Main Street and Wall Street have grown comfortable – too comfortable – with very low inflation over a very long time. It’s made work easy for the Fed, too, which has been able to  keep interest rates low with no inflationary push back – until now.

At their meeting last week, Fed governors decided to begin closing the spigot – slowly – on the easy money that’s been flowing into the economy since the pandemic began. They also indicated that they’re likely to raise interest rates next year.

What we don’t know is exactly when the Fed will start pushing up rates, how high they’ll go, and whether costlier borrowing – think small business loans, credit cards and mortgages  – will hurt Main Street.

2. Where are the jobs?

U.S. unemployment is falling faster than anyone expected. After the great recession of 2007-2009, it took three years for the unemployment rate to fall below 8% from a peak of 10.6%. This time, it took just months. In November, unemployment was just 4.2%, down from an eye-watering 14.8% in the early days of the pandemic. 

Yet overall employment remains lower than the jobless rate might suggest. The U.S. has 4 million fewer workers than it did before the pandemic. People have left the job market, retired early, or are on the fence about when or how to jump back into the daily grind.

At the same time, demand for workers has never been greater. Job openings have surged to record highs. On the face of it, there are more openings than there are people looking for work.

With demand roaring back we’ve gone from asking “Where are the jobs,” to “Where are the workers? And when will they come back?”

3. The battle for equity

The coronavirus outbreak had an uneven effect on workers. Now the jobs recovery is playing out unevenly, too.

The pandemic exacerbated existing labor market inequities. Low-skilled workers took the brunt of job losses. The recovery has been slowest for people of color and women. Women also are disproportionately shouldering added family responsibility and suffering bigger pay gaps.

Economists like myself have known for a while that building equity into compensation models can have a strong, positive business and economic impact over the long term.

We now also recognize another element critical to the equity equation — structural support, such as affordable daycare, that can empower job seekers.

In 2022, employers will need to decide whether to prioritize pay equity and social infrastructure for their workers.

My Take

As we close out another year living and working under the shadow of Covid-19, uncertainty still hangs heavy over businesses, employees, and consumers.

But we enter the new year armed with lessons we’ve learned in 2021. Prime among them is that a healthy economy requires a healthy Main Street.

Wishing all of you good health, happiness and some well-deserved down time this holiday season. See you in 2022!