It is economic forecasting season, so universities and consulting groups are offering their projections for 2022. I did so this week, continuing work from Ball State University that started a half century ago. Over the last 50 years, a dozen or so Ball State economists have authored economic forecasts for east central Indiana, the state and the nation. This has long been part of the University’s mission to state taxpayers, as well it should be.

The process of an economic forecast involves a lot of mathematics and a lot of common sense. The economy next year always looks a lot like last year, and the year before, and the year before that. But, it also depends upon short-term changes, such as recovery from COVID, the cost of borrowing, the availability of workers and expectations about future spending by governments, businesses and households.

Differences in forecasts almost always hinge on assumptions about upcoming changes to these. If you assume interest rates will remain low, COVID will be modest and consumers ready to spend, then the outlook will be optimistic. If you assume the Fed will raise rates, that the pandemic will continue to hurt spending and fewer workers will re-enter the labor force, your projections will be far worse.

To perform these forecasts, we construct a series of mathematical equations. That isn’t meant to be sophisticated, just transparent. Anyone framing a new home uses hundreds of equations, they just do most of it in their head. The transparency lies in looking at the joists and beams. If you screw it up, it is obvious. Not so with economists; we must write it down so our skeptics can see it, and more commonly, so that we can get better next time.

In some ways, 2022 is harder to forecast for two reasons. First, we remain in the grips of COVID, with new variants coursing through workplaces and schools. Second, we are winding down a large fiscal and monetary response to COVID that has reduced interest rates to near-zero and sent more than $4 million of federal spending into the economy. Together, the forced savings caused by COVID surges and the stimulus put nearly $2 trillion of savings into American households. How they spend those savings, and how COVID affects their decisions to spend will determine the path of the economy in 2022.

Today we are in the midst of a COVID surge that will kill and sicken tens of thousands of Hoosiers and hundreds of thousands of our fellow Americans in the coming months. That is a huge uncertainty that affects both the demand for goods and services and the supply of both. If the disease continues well into the spring, we should expect slowing demand for restaurants and accommodations, retail and other in-person activities. Given our experience in 2020 and early 2021, this could be significant. At the same time, the excess morbidity of COVID restrains labor supply in many ways.

COVID has killed 250,000 working age adults, and sickened far more. In terms of net loss of labor supply, we’ve seen nothing this bad since the Civil War. Then, there are the ripples of sorrow that accompany nearly 1 million unexpected deaths. Finally, there are many families who remain uncertain about the path of the disease. They may need someone at home to care for children who are quarantined from school or to provide support for a family member who continues to suffer from the lingering effects of the disease.

We are a nation of some 330 million people, so it is easy to see how 4 million to 6 million people who wanted to work in 2022 cannot because of COVID. This constraint on labor supply, which is so understandable, is enough to mute economic growth in 2022. And that is the preamble to my forecast.

The recovery from COVID has been reasonably robust. Americans returned to work in droves throughout 2020 and 2021. Even with continued risk, we saw amazing flexibility from our private sector businesses. From retail and restaurants to logistics and manufacturing firms, the U.S. economy has been astonishingly resilient. I remain in awe of how energetic and responsive American businesses have been regarding this disease.

The early complaints of labor shortages have been met by significant wage increases in some occupations. In the leisure and tourism sectors, which were hardest hit by COVID, wages for production jobs, such as wait staff, cleaning services and customer service, have risen by more than 10 percent this year. Still, many businesses find it hard to fully staff their operations and are going to need to adjust hours and services.

At the same time, federal spending on stimulus will taper off in the coming months. Families with big savings seem to have made large purchases, but savings rates are back down to historical levels. While strengthening, hints of inflation will cause the Federal Reserve to tighten money supply. Together, this means less demand for goods as consumers have fewer dollars to spend and borrowing becomes more costly.

This combination of conditions offers the essence of my forecast.

In 2022, I project that economic growth in the U.S. will slow from 2021 levels. This will look like a rapid deceleration of growth as our economy descends from quarterly GDP growth of 6.5 percent in the first half of 2021 down to growth rates in the 2.0 to 2.5 percent range in 2022. This will make the U.S. economy look more like the slower-but-sustained growth of 2018 and 2019 rather than the fevered recovery from the pandemic.

Here in Indiana, the economy has recovered about on par with the nation as a whole, though more of our recovery occurred in late 2020 than in 2021. This recovery has been broad, affecting every sector and generally offering employment opportunities to most Hoosiers. The recovery has left the Indiana General Assembly with $0.5 billion in excess tax revenues. The coming year will see a return to more normal tax revenues, especially considering the effects of inflation on such things as pensions and healthcare of government workers.

All in all, 2022 will be a decent year for economic growth. It will also be a year in which the U.S. and Indiana economy return to the pre-pandemic levels of GDP, but with modestly smaller employment than in 2019. Goods and services will be more expensive due to inflation, but we are unlikely to see accelerating price increases.