January 2022 Q&A

Welcome to my first monthly Q&A post. There were a lot of questions. Sorry if I didn’t get to yours. Note that I rewrote a few of the questions to make them shorter for ease-of-reading.

Down the road, I *might* try to do one of these Q&A posts as a podcast (which would be distributed via email just like the normal posts). Any interest in that? Let me know!

As a final note, this first Q&A post is available to all subscribers, but future Q&A posts will only be available to paid subscribers (like the Week in Review posts).

Now, onto the questions:

General Questions

A lot of folks 55+ are leaving the labor force, a lot of them for “other” reasons (according to surveys). Why is that happening and how/when do you think we’ll have a better understanding of the role that specific factors (like chronic illness) are playing in those decisions?

I think the “other” category captures a lot of different factors. For some, rising asset prices made retirement more financially feasible. There was likely a segment of people still working because they either enjoyed their job or at least didn’t mind it who suddenly minded it in the context of the pandemic (think teachers and nurses).

Once workers get to 55, the labor force participation rate degrades pretty quickly: about 80% of 50-54 year-olds are still working, 72% of 55-59 year-olds, 57% of 60-64 years, and just 19% of the 65+ demographic. If the pandemic effectively made workers retire as if they were a few years older, it could have dramatic effects on the rate at which people threw in the towel.

As to when the dust will clear and we’ll know more about what goes into the “other” category, your guess is as good as mine. Surveys (like the Census Bureau Household Pulse survey) may shine more light on this matter by the end of the year, but it’s conceivable that many of these Baby Boomers didn’t fully understand the ramifications of their decision to retire. With inflation elevated and wages drifting higher rapidly, that may induce some to come back, and that would be a fine thing for the economy.

Do you think inflation eases in late 2022 and with that, do you think the stock market can hold its gains until 2023? Or will inflation fears push the stock market back as supply chain issues continue?

Inflation will ease during the latter stages of 2022, at least that is my prediction. However, monetary policy will be meaningfully tighter relative to the status quo. Recent market volatility suggests that valuations are strained, and there is likely further room to the downside. That said, if the first half of the year remains jittery, that could set the stage for a second half rally, particularly if I’m right about inflation. What’s more, where else can you put your money other than U.S. equities? One only has so much patience with bitcoin, etc.

Europe price indices are starting to rise at a faster rate. Will that catch up with the U.S. and prolong this period of inflation?

This is part of the broader supply chain issue, and it won’t last forever. Sure, supply chain issues will persist over the next several months (thanks, omicron), but by the latter half of this year, we’ll probably be talking about something else. So in the near-term, inflation stays hot. But then by the third quarter, things begin to look rather different (prediction, grain, salt).

Are current decarbonization goals realistic given current supply chain/labor challenges?

These supply challenges won’t last forever and technology is progressing rapidly. Your guess is as good as mine regarding when we will achieve net zero emissions, but I think many of these goals are realistic and that in 10 years our infrastructure will be far more sophisticated. It’s hard not to sound naïve when suggesting that good things can actually occur, but that’s my story and I’m sticking to it.

Community college enrollment is usually countercyclical with the economy, but that changed during the first 18 months of the pandemic. Will we see a return to that countercyclical trend as the economy recovers, or will community college enrollment increase in light of the cost of higher education and the Great Resignation? With jobs so plentiful and workers so scarce, will people decide to go for a quick-hitting credential rather than pursue an associate’s degree?

Indeed, college enrollment was declining prior to the pandemic, probably for demographic reasons and greater focus on student debt at the household level. The pandemic has accelerated enrollment declines, with community college enrollment especially impacted. I suspect that 2-year college enrollment will stabilize and then begin to rise during the years ahead. Many young people have decided that they don’t want to take on student debt, and in many instances their only pathway to a student debt-free existence is to attend a 2-year college. Wildcard – there is a proliferation of certificate programs, and with jobs so plentiful, people might decide to go for a quick-hitting credential rather than pursue an associate’s degree?

Covid-19, like inflation, appears to be less transitory than we hoped. With the virus seemingly endemic, who are the business winners/losers and where are their business opportunities?

It seems to me that the big winners are those that support megatrends like the move to e-commerce (e.g., data centers/driverless vehicles), electric vehicles, and digitization. Homebuilders also stand to be among the big winners given the shortage of housing. Among the losers: shopping malls (were already losing), hotels with large conference facilities, office space, and network television.

Do you think domestic airlines will start to require passengers to get vaccinated?

No. If it was going to happen, it already would have. With omicron already beginning to fade, we appear to be (again) headed toward normalcy. I am guessing that mask requirements will be eliminated around April/May.

Despite offering large bonuses for entry level positions, we still can’t find workers, and I've heard many similar reports from other retailers across the country. Can you help me understand this dynamic?

People have changed, and not just during the pandemic. The movement toward work-life balance has been on for years. Younger generations just don’t seem to be as motivated by money as Boomers and GenX were. Mass retirements by Baby Boomers probably leads to some workers skipping entry level positions, and expanding employment opportunities in logistics is likely taking some of those same workers.

What is likely to be the impact on summer tourism given the staggering inflation rates, weakening consumer spending trends and the issues with a limited workforce to support a robust summer tourism season?

Provided omicron goes softly into that good night, I think Americans will take their vacations this summer. Sure, inflation may induce some folks to head to a local beach instead of Maui, and worker shortages might mean the lines (and prices) at the soft-serve place are longer (and higher) than before, but there’s pent up savings from the pandemic and pent-up demand for vacations. Of course, take this prediction with a grain of sand from your favorite beach.

Construction

Given the strength in backlog and the potential for more jobs in the pipeline stemming from the IIJA, do you think [construction] contractors will have a more favorable position in the bidding process? I.e. they could pick and choose jobs to bid, going for the ones with better profitability?

Yes, contractors will be in high demand. But in many instances, they will only bid on a few jobs not because they can afford to be choosy, but because they are worker-limited in terms of delivery of construction services. Supply chains will work themselves out at some point, but labor scarcity will remain a limiting issue for the foreseeable future.

In a construction market constrained at least on one level, and in some locations, by labor availability, how much can construction activity increase and still effectively be put in place?

In terms of delivering units of construction, the industry is highly constrained. Low labor force participation, including among young men, really hurts. Construction spending will increase this year, but that will largely reflect inflationary factors as opposed to a meaningful increase in output. The exception to that will likely be public construction, where there will be both an increase in output and in cost/unit delivered.

Maryland

What are your thoughts on Governor Hogan's new Retirement Tax Reduction Act and what does this mean for Maryland retirees (especially in light of the sheer numbers leaving the state)?

The Governor is right on point from a policy perspective. Maryland loses too many retirees, especially wealthy ones. That’s not good for retailers, real property tax base, etc. I hope he gets it done.

It seems fewer tourists and people from the counties come into Baltimore due to crime. It also seems businesses are downsizing in the city as well. Have there been any studies showing the economic impact of the high crime rates?

It is hard to separate the impacts of crime from other Baltimore maladies, including the highest property tax rate and the lowest public school test scores in the state. What’s more, Baltimore’s suburbs have developed nicely, with more shopping/activity available in Towson, Columbia, Owings Mills, and White Marsh. I did some research regarding retail activity after the 2015 unrest. I found that at that time, visitation plummeted and never really came back. Then the pandemic . . .

Questions for Next Month

Send ’em my way, please and thanks!