According to a Washington consulting firm, the U.S is facing several major challenges as we go into 2022, inflation, “softness” in the White House, and the pandemic are high on the list.
“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 administrations said. “The most recent analysis targets 2022 and identifies the emerging risks business and government leaders should anticipate and prepare for.”
The Washington, D.C.-based consulting firm recommends that companies understand and prepare for trends and risks involved in the policy environment.
Mehlman’s report, “Living In Limbo: Anticipating the Top 2022 Risks In Politics and Policy,” discusses many risks in politics and policy.
Going into 2022 the risks associated with COVID-19 won’t suddenly disappear.
“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 is either a common cold or that we will all get sick and die,” Mehlman said.
Instead, he compares it to a serious flu strain and so we will have a new strain every year, he went on.
“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 said.
“The risks are overhyped, and the preventions are under-embraced,” he explained, adding that those preventions include mass vaccinations and wearing masks when bad outbreaks occur.
COVID-19 cases continue to spike in the U.S and in other parts of the world since the emergence of the Omicron variant. More than 90 countries have reported Omicron cases, leading some to implement new lockdown protocols. 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 announced Monday the Omicron variant has become the dominant strain in the U.S., comprising 73% of reported cases. While cases continue to sore, deaths have not increased at the same rate, leading some to believe the new variant is less dangerous than previous strains.
In 2021 we saw a multitude of extreme weather disasters, increasing costs, challenging supply chains, and driving policy, Mehlman explained.
“So far, these policies have disfavored fossil fuels, reducing investments and inventories causing severe energy inflation,” Mehlman added.
Furthermore, increased severe weather disasters pose a serious risk to insurers.
“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 stated.
“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 explained.
“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, citing the recent winter freeze in Texas.
A major 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.
There are three levels of problems facing supply chain issues as we face the new year, short-term, medium-term, and long-term.
The short-term risks are global employees, semi-conductors, and energy shortages that have become worse due to politics.
The medium-term challenge for supply chains is the growing theme of economic nationalism, Mehlman explained. 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 said.
Continued inflation will be a challenge to the Biden administration’s agenda, Mehlman stated.
Soaring prices will determine how the Federal Reserve goes forward with its monetary policy heading into 2022, how much money the government will try to spend on safety nets and infrastructure, and whether 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 said.
Inflation has skyrocketed 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, soared 9.6% year-over-year as of November, growing at the fastest rate ever measured.
Surging inflation, coupled with falling unemployment, triggered the Federal Reserve to speed up its asset purchasing stimulus while also forecasting three interest rate hikes in 2022.
The biggest challenge 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 said. “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 powerful stock market with justified profits, but also noticed characteristics of a bubble, he said.
Stock markets fell Monday as the spread of the Omicron variant sparked 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%.
President Joe Biden’s perceived “softness” will serve his political risk entering 2022, according to the report.
Mehlman cited Biden’s softness on the border, economy, crime, and foreign policy. As his approval rating continues to tank, and more Americans recognize failures and weakness in the respective categories, Biden and the Democrats will have a more difficult time passing legislation, Mehlman explained.
“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 said.
Approximately 46% of respondents approved of Biden’s handling of the COVID-19 pandemic, while 48% disapproved, according to a recent survey. Biden’s economic approval also nosedived with 37% approving and 56% disapproving.
Biden’s disapproval rating soared again on Monday reaching 55%, according to an NPR/PBS News Hour/Marist Poll.
Examining the future of U.S.-China relations, Mehlman saw a steady decline between the two world powers, but people shouldn’t “assume everything will catch on fire,” he said.
“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,” he said.
Business leaders have seen employee activism following the Trump administration and George Floyd’s murder to encourage businesses to get engaged in non-traditional issues. 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 said.
“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.