High inflation likely a long-term trend

James Nowak

U.S. GDP growth will likely slow next year as the economy returns to pre-pandemic levels, said United Bankers’ Bank Vice President of Risk Management James Nowak.

The economic outlook for small businesses will be challenging as some have only stayed afloat over the last two years thanks to loans through the Paycheck Protection Program, Nowak told attendees at the annual fall Bank Holding Company Association meeting. Next year, for only the fourth time since 1984, small business earnings are expected to fall. Over 700 firms in the Russell 3000 — 23 percent — are estimated to be “Zombie companies,” and owe banks a total of $2 trillion. “It’s very problematic,” he noted. 

A record amount of federal stimulus dollars has contributed to inflation and caused an influx of bank deposits. Nowak expects gas, oil and food prices will increase over the next 12 months. The Federal Reserve liquidating the economy has caused fewer people to seek bank loans, Nowak noted, and businesses have little inventory to sell. Hiring remains a challenge: There are eight million open jobs and approximately nine million people out of the labor force, and Nowak noted that vaccine mandates could further depress economic growth next year and cause health care employee shortages. The Fed stopped buying corporate bonds on Dec. 31, and pandemic unemployment benefits ended in September. The federal government’s eviction moratorium has ended, and the Federal Reserve is minimizing asset purchases. 

“You and I are going to hate the next year,” Nowak said. “From a pocketbook perspective it is going to be tough.”  

The return to a normal economy “will be uneven and bumpy,” but will likely not lead to a recession or contraction, Nowak noted. The bond market is not panicking and rate increases continue at a slow and steady pace. There is $17 trillion in negative yielding debt around the globe and much demand. Reduced government stimulus spending is good news for bank lending, Nowak said, and loan growth is expected to begin to accelerate if past trends continue. The economy is in mid-cycle, Nowak said. Interest rate hikes should begin late next year. 

“It’s a return to normal, and so it’s important that we have ‘normal’ in the back of our minds as we talk about things,” Nowak added.