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Inflation is Getting Broader, Not Cooler

Jacob Hess
January 20, 2022

Inflation is 7%. You definitely don't say that every day. In fact, you probably haven't said it since the 1980's (assuming you could talk back then). The December CPI report capped off a year of volatile prices. In the second half of 2021, we saw a rapid increase in inflation caused by supply disruptions and surging demand. The latest report suggests those factors are persisting into 2022.

We got to this point thanks to gains in two particular subindexes: energy and vehicle commodities. Supply shortages in the energy and automotive industries were some of the first to crop up and made headlines over the summer. Both also suffered from the recession of demand during the pandemic which set back capacity utilization when economic activity resumed at a stronger pace. The initial thinking was that these shortages could be temporary since they could be resolved by supply ramping up. That resolution hasn't come.

Energy

Everyone has seen rising energy prices as they pass by gas stations in their car, and they feel the pain when their tank nears empty. The index for energy prices started its sharp rise in Q1 2021 reaching an annual gain of nearly 28% in May before flattening out shortly over the summer. The trend continued in October when Energy CPI recorded a 4.8% monthly increase. The index was just slightly off its high (made in November) in December after it registered its first monthly decline since April.

Retail gasoline prices have followed a similar trend but without the slight pause in May. In fact, the -2.6% monthly decline seen in December was the first of the year and that still left prices above the October 2021 peak and up over 52% annually. Crude oil prices in December averaged over 50% higher than a year before; however, they also retreated in the last month of the year, down -2.6% month-over-month. Some may point to the softness in energy CPI and commodities in December is a sign that shortages in the industry are easing, but there is still a long way down. Omicron has also complicated things and delayed any resolution here.

Transportation commodities

Vehicles were hard to find in 2021 due to a semiconductor shortage that led to a massive decline in car and truck production. Transport exports and inventories suffered in just about every country's economic reporting. In the US, monthly auto production reached its 3rd lowest point of all time in September at 84,300 units (only above April and May 2020 production) and was reported at 126,000 in November, more than -42% below its pre-pandemic level.

Since there is still a massive deficit in auto production, prices are still rising. The earliest gains in transportation commodities (less fuel) prices were bulky with monthly gains of 4.3%, 4.0%, and 5.6% from April to June driven by sharp gains in used car prices. The elevated used car prices bled over into other indexes, and 4/6 of the base indexes that make up the transportation commodities were up over 10% annually. The other two are up over 9% annually. There has yet to be a resolution to the surge in vehicle prices, but semiconductor companies have indicated that increased capacity should be here in 2022. Until then, prices could keep rising.

Broader Inflation

These categories were to blame for the initial CPI surge. The breadth in price growth wasn't really there over the summer of 2021 and lead to many (including the Fed) to believe that inflation would be largely transitory and could even be trending normally by the end of 2021. The opposite has happened. Supply disruptions leading to price increases spilled over into other industries and other subindexes of the CPI. Looking at the 210 base indexes that are reported in the CPI, an increasing amount surged past annual gains of 5% and 10%. In December, there were 95 indexes above 5% and 33 above 10%, both higher than any other month in 2021.

With the many increases over those 5% and 10% thresholds that came across different indexes, there weren't a comparable amount of decreases below those thresholds. Net increases minus decreases over those thresholds were positive in every month in 2021 except for September. Inflation is not cooling, and we enter 2022 with no clear signs that it should in Q2 2021.

The implications for the Federal Reserve are urgent. The resounding 7% at the end of 2021 means that they missed on their inflation forecasts. The latest median projections that the Fed made in December have the FOMC voting for 3 rate hikes in 2022 after tapering finishes in Q1 2022. If Chair Powell and members want to maintain credibility in the face of inflation, it seems that they will have to have a more hawkish response. Normalization at the speed of 4 or more rate hikes in a year would surely be aggressive in the current policy environment, but unusual inflation may well call for unusual policy.

Unemployment Insurance During the Pandemic

Jacob Hess
January 12, 2022

US consumers were flush with cash following the pandemic despite record high unemployment thanks to the unprecedented coverage of jobless benefits (also reaching a record). In the 12 months following the trough of the COVID-19 recession in April 2020, the total number of continued claims of unemployment insurance as a percentage of the unemployment level averaged 71%. In previous recessions, this percentage averaged 41% and never topped 50%.

From FRED

Of course, the recently experienced recession was different than recessions before with public health concerns prompting emergency assistance for workers forced to sit on the sidelines. With the more unemployed individuals receiving checks (larger checks too), the bounce in personal consumption expenditures (PCE) a year after the trough of the pandemic recession was quite spectacular. There is a loose trend of higher UI coverage leading to a stronger PCE recovery in the 6 recessions before 2020 (though 1980 and 2001 are clear outliers), but our sample size is small. However, with all other things equal, it makes sense that giving support to workers who have lost their wages during a recession will help a recovery be stronger.

From FRED

A Year of Normalization

Jacob Hess
January 09, 2022

The Week Behind

The first full week of the new year comes to a close, and we have quickly found out that 2021 and 2022 may have many similarities. The most obvious similarity is the existence of a highly transmissible respiratory virus still floating disrupting economic activity (for the 3rd year) that many will be hoping is an insignificance by the end of the year. Forecasts for growth across the globe are again above the pre-pandemic trend with more downside risk than upside risk (likely the last year of stimulus driven growth). Amidst it all, central banks continue to tighten monetary policy (2021 was the year for asset purchase tapering; 2022 is the year of increasing interest rates).

Normalization will be a key theme for the year. The extreme trends that have developed over the last two years in prices, in the labor market, in global trade, and in public health will start to calm to start a transition to a more normal economy.

The start of a new month prompted the release of another set of PMI reports from IHS Markit describing manufacturing and service sector activity in December. The Global Composite Output Index reached a 3-month low of 54.3, down from 54.8, reflected a broad-based decline in indexes in most major economies as a result of outbreaks of the Omicron variant. Within the Global Index, China was the only country (of 12) to see an increase in the expansion of its output as it tries to bounce back from a contraction caused by its troubling real estate sector. While economic growth did slow, it did not slow to the extent that some may have thought it would following the surges in Omicron cases.

Other noteworthy data points included declines in the Input Prices index (down -0.8 pts to 68.5) and the Output Prices index (down -0.5 pts to 59.0) for manufacturing and in the Input Prices index (down -0.4 pts to 68.1) and the Prices Charged index (down -0.1 pts to 58.7) for services. While there is still plenty of evidence that supply strains are causing issues, the declines in these indexes suggest there may be a top in price growth coming soon if it hasn't already come. The reports of labor shortages due to Omicron after the Christmas period could delay that top but likely only temporarily.

The end of week concluded with the last jobs report of 2021. The US added 199k jobs, and the unemployment rate fell -0.3% to 3.9%. The service sector continued to lead the job gains with 157k while the goods sector added just 54k (government employment fell -12k). With these job gains, the unemployment rate drops further below the Fed's median projection for 2021 of 4.3%, making substantial progress toward the 3.5% projected for 2022. The only real weakness that the Fed might sense in the labor market is the labor force participation rate which was little changed at 61.9% in December, still well below the 63.4% in Feb 2020. However, a wave of early retirements during the pandemic means that it might never recover. Ironically, a weak labor force participation rate could also mean that wage inflation remains elevated causing further price instability.

Welcome to 2022.

Chart of the Week

From FRED

Both the unemployment rate and labor force participation rate have moved back towards normal since February 2020, but the recovery in the latter has stalled despite jobs being added monthly.

The Week Ahead

Inflation reports from the US and China come out next week. Both are expected to see some degree of cooling as PMIs that came out at the beginning of the month have pointed to. Euro area unemployment rate and industrial production will also give some idea of how some countries' reactions to the Omicron news affected the economy in November.

What Will GDP Growth Look Like in 2022?

Jacob Hess
January 04, 2022

A new year is upon us and so are a new set of annual outlooks. The top financial organizations have taken turns guessing what growth might look like in 2022, with most focusing on global and developed market growth. We've compiled a list of forecasts from 25 different sources.

Overall, analysts are looking for a year of above trend growth as the pandemic continues to ease its grip on the economy. However, many cite unignorable downside risks that new variants or other virus complications could create. Another contractionary force that should let up in 2022 is the disruption caused by supply chain disruptions. More smoothness in global trade and production should unlock recovery gains that were supposed to be seen in 2021. As COVID and supply issues resolve, central banks (particularly developed market central banks) will continue the taper that began in Q4 2021 and transition to monetary tightening by Q2 2022.

  • Global growth projections for 2022 center around the mid-4% level and are more tightly centered around the median (4.4%) than projections of growth of individual countries. The minimum was given by Citi at 3.8%, and the maximum was given by Charles Schwab at 4.9%.
  • US growth projections for 2022 are slightly lower than the global projections and below the 5.5% that is expected in 2021. With a sample size of 22 estimates, the median forecast is 4.0% (given by the Federal Reserve). The minimum was given by FT Portfolios at 3.0%, and the maximum was given by the IMF at 5.2%. It is worth noting that the two highest forecasts (5.2% by the IMF, 4.8% by the Bank of England) were two of the earliest forecasts given.
  • Eurozone growth projections for 2022 are quite optimistic as the median edges out the US. The euro area is likely to see more of its rebound in 2022 after being held back more in 2021, and it will benefit from a more cautious ECB that is delaying monetary tightening. The median estimate is 4.1%, just 1 percentage point below 4.2%. The minimum is given by Northern Trust at 3.1%, and the maximum is given by UBS at 4.8%.
  • China growth projections for 2022 reflect a reformed economy that is likely to slow from its pre-pandemic pace that reflected its emerging market status. The median estimate of 5.0% is 0.6 percentage points above the global median of 4.4%. The minimum is given by the Conference Board at 3.3%, and the maximum is given by the IMF at 5.6%.
  • UK growth projections for 2022 are strong as its economy should experience a strong bounce after going through a series of strict restrictions. The UK is expected to surpass global growth with a median estimate of 4.6%. The minimum is given by Northern Trust at 2.8%, and the maximum is given by Goldman Sachs at 5.3%.
  • Japan growth projections for 2022 are, once again, trailing its developed market peers. Post-pandemic Japan is likely to rebound on easing restrictions but limited by Chinese weakness and struggling inflation. The median projection is at 2.8%, the weakest of the developed market forecasts selected. The minimum is given by Northern Trust at 1.9%, and the maximum is given by Fitch Ratings at 3.4%.
  • Finally, emerging markets growth projections for 2022 are strong. These nations are the ones struggling with increasing their vaccinations rates and will also be the ones that benefit from more expansive vaccine coverage. The easing of supply disruptions and strong developed market consumption will also boost growth in emerging market exporters. The median estimate is 5.0%. The minimum is given by Wells Fargo at 4.5%, and the maximum is given by the Bank of England at 5.25%.
2022 GDP Growth Forecasts (Selected)
Summary Data: 2022 GDP Growth Forecasts (Selected)
(Click forecast column for report source)
Forecasts Global US Eurozone China UK Japan Emerging Markets
Charles Schwab 4.9%
IMF 4.9% 5.2% 4.3% 5.6% 5.0% 3.2% 5.1%
UBS 4.7% 4.2% 4.8% 5.4% 4.6% 3.1% 5.1%
Morgan Stanley 4.7% 4.6% 4.6% 5.5% 4.6% 2.9% 4.9%
Goldman Sachs 4.5% 3.9% 4.4% 4.8% 5.3% 2.8%
LPL Financial 4.5% 4.3% 5.0%
ING 4.5% 4.4% 3.8% 5.4% 4.3% 2.2%
Mean 4.41% 4.03% 4.12% 4.99% 4.56% 2.69% 4.89%
TD Bank 4.4% 4.1% 4.1% 5.4% 4.7% 2.6%
Median 4.4% 4.0% 4.1% 5.0% 4.6% 2.8% 5.0%
Wells Fargo 4.4% 4.4% 3.9% 5.5% 4.3% 2.3% 4.5%
JPMorgan Chase 4.3% 3.8% 4.6% 4.7% 4.6%
IHS Markit 4.2% 4.3% 3.7% 5.5%
Fitch Ratings 4.2% 3.7% 4.5% 4.8% 5.0% 3.4% 4.7%
S&P Global 4.2% 3.9% 4.4% 4.9% 4.6% 2.3%
Conference Board 3.9% 3.5% 4.1% 3.3%
Citi 3.8% 3.5% 3.9% 4.5% 4.2%
Northern Trust 3.5% 3.1% 4.5% 2.8% 1.9%
DWS Group 4.1%
FT Portfolios 3.0%
PNC Bank 3.8%
CIBC 4.2%
RBC Capital Markets 3.5% 3.9% 4.9%
Federal Reserve 4.0%
ECB 4.2%
Bank of England 4.8% 3.8% 5.0% 5.0% 5.25%
Bank of Japan 2.9%

8th Meeting of FOMCmas

Jacob Hess
December 21, 2021

The Week Behind

In the 8th FOMC meeting, Chair Powell gave to us…

Merry Christmas!

Chart of the Week

From Federal Reserve

The Federal Reserve has been busy decorating for Christmas with their dot plot projections. Several FOMC members are expecting to see multiple rate hikes in 2022.

The Week Ahead

We hope everyone has a safe and relaxing holiday week and Christmas. The 2022 outlook may be clouded by inflation uncertainty and supply chain crises, but a continuation of the recovery is likely.

An Awkward Economy

Jacob Hess
December 12, 2021

The Week Behind

Awkward. The global economy is in an awkward position. Labor markets in developed markets are hot, and inflation is still rising (both especially true in the US). However, just as the signs of too much demand reach their peak, new risks arise. The Omicron variant has added uncertainty to the outlook for the pandemic which looked to be fizzling out following the Delta variant outbreak. The new public health issue has thrown a wrench into the plans of many central banks who need to respond to inflation with tightening but could be forced to react with easing to new COVID restrictions. Meanwhile, US equities look to set new records.

US stocks have been volatile over the last two weeks. A bearish end to November shaved of about -5% from the S&P 500 in response to the emergence of the Omicron virus. However, that was followed by an immediate bounce at the beginning of December which brought the equity market back near all-time highs. The bounce looks "awkward," though, for two reasons: (1) the volumne of advancing shares vs declining shares in the first week of December was weak historically and (2) insider trading selling set a new annual high through the first 11 months of 2021.

From Wall Street Journal

Potential awkwardness that could come from a US default on the national debt looks to be put to bed by the news of a deal between Senator McConnell and Majority Leader Schumer which would allow the Democrats to pass a bill to raise the debt limit just before the Treasury is set to run out of money on December 15th. It seems to be business as usual in the sense that it is a temporary reprieve that pushes the issue back another year. In another nod to the status quo, moderate Democrats look to be flexing their power in the infrastructure bill negotiations as they cite inflation as a concern when choosing the size of spending. Raymond James sees spending shrinking "from as high as $6 trillion to ~$1.75 trillion."

Central banks are taking the center stage this week, and this won't be the last time. In fact, monetary policy will be a huge theme in the first half of 2022. But at the moment, different reactions to the Omicron variant have led to differing policy outlooks which could leave leading central banks in an awkward position of policy divergence. The Fed seems on track to tighten asset purchases as new virus fears probably won't change its outlook, but the ECB and Bank of England could be distracted if the nations they represent move towards policy public health restrictions in response to Omicron.

Nevertheless, inflation demands to be addressed. The November US CPI reading signaled another month of robust price growth at 0.8% MoM and another acceleration of the yearly pace to 6.8% YoY. Core CPI also accelerated from 4.6% YoY to 4.9% YoY on further increases in automobiles, apparel, and indexes related to travel (see Chart of the Week). The pace of increases has slowed, which is a good sign, but inflation has not peaked. Chair Powell notably dropped his evaluation of inflation as "transitory" this week as well. That was a bit "awkward" after using it so heavily for the past 6 months.

The good thing about the end of the year, particularly in December, is that most people get to spend it away from these "awkward" topics (maybe not if you're an economist). Seasonality seems to have taken over markets which seem to be entering into their typical "Santa Claus rally" pattern. Regardless, the questions asked of the economy will have to be addresses and central bank announcements this week may guide us on how financial leaders will start to provide answers in 2022.

Chart of the Week

From BLS

Consumers are preparing for an expensive Christmas, but they might be able to reduce the burden of rising prices by celebrating at home. Some away from home categories exceed or are about the same as their at home counterparts. This may be more of a result of leisure and hospitality labor shortages than goods inflation. Total job openings and total quits were up 61% YoY and 24% YoY in October while the leisure and hospitality industry saw job openings and quits rise 101% YoY and 47% YoY.

The Week Ahead

PPI and retail sale releases come out this week before the Fed releases its announcements. Many are expecting further guidance on tapering and updated projections to give guidance on rate hikes next year. The Bank of England and the ECB will also provide policy updates. The BoE might even raise rates in response to rising inflation depending on their initial assessment of the Omicron threat.

Q3 Earnings Were Surprisingly Good

Jacob Hess
November 22, 2021

The Week Behind

Companies have been reporting Q3 2021 earnings for the past few weeks now, updating on how supply disruptions have affected various industries. With the macro environment that had developed over the summer, many analysts were worried there could be some disappointment in Q3 numbers especially with input costs rising and labor shortages persisting. However, their doubts have mostly been proven wrong as firms' bottom lines were resilient.

According to FactSet, 81% of S&P 500 companies have reported a positive EPS surprise, and 75% have reported a positive revenue surprise with 92% reporting. The blended earnings growth rate (earnings growth for those who have reported plus the estimate for those who are still to report) is 39.1% for Q3 2021 which would be the 3rd highest annual rate of earnings growth since 2010. While this is not as strong as Q1 at 49% YoY and Q2 at 92% YoY, it is a strong showing in the context of supply constraints.

From Raymond James

This hasn't stopped discussions of inflation cropping up in earnings call. In fact, "inflation" seemed to be a bit of a buzzword coming up 285 times in S&P 500 earnings transcripts, the most in the last times and more than twice the 5-year average. There are still 40 more Q3 calls yet to happen. It's not much of a surprise that inflation has become an issue, but it may be a surprise that companies are managing their bottom lines so well in the face of it. Of course, we have seen that those costs are coming through to consumers finally, but PPI is still significantly higher than CPI even in the latest October report: headline CPI at 6.2% and core CPI at 4.6% vs headline PPI at 8.6% vs core PPI at 6.2%.

This hasn't weighed on margins as much as it typically might because demand is still experiencing strength from excess savings and the pent-up consumer activity that has been released by restrictions. Invesco reports that the S&P 500 so far is reporting a net profit margin around 12.9% which is near a record-high. Prospects for Q4 margins look solid so far as well, forecasted at 11.8%, only a slight decrease expected from Q3 even though inflationary pressures seem likely to remain harsh.

Consumer activity during the holiday season will likely help out many companies that have been forced to raise prices. Many retail surveys point to households spending around the same as 2019 if not slightly more, but they have also planned to start spending earlier than usual. This may push have pushed some firms' revenue to the back end of Q3 that may have typically come through in early to mid Q4. It's speculation but something to consider.

Regardless of how the holidays go, more demand is being spoon-fed to US companies in the form of the infrastructure bill just recently passed in November 2021. This is especially true for the Industrial and Energy sectors which are projected to see earnings growth spike. In particular, Fidelity points to expectations of 37% and 30% YoY forward EPS growth for Industrial and Energy companies respectively.

Despite what headlines are telling you about supply disruptions, US corporations found a way to excel in Q3. Post-pandemic business optimism appears to be in store for 2022, but that could come at the cost of the consumer. Although, excess savings should dampen the pain. There are plenty of reasons to be bullish on US businesses, and earnings last quarter are a big reason why.

Chart of the Week

From FRED and Ycharts 1 2

S&P 500 net profit margins have held up well in Q3 2021 despite the CPI-PPI spread turning lower due to elevated input cost inflation.

The Week Ahead

Wednesday is the day to watch with lots of economic data to chow on before moving on to another feast on Thursday. Durable goods orders and another GDP update are the big ones with some interesting economic footnotes provided by new home sales and UMich's consumer survey. Likely not enough to shift views on supply disruptions and get equities out of the rut they have fallen in.

Inflation Weights on Bonds and Consumer Sentiment

Jacob Hess
November 14, 2021

The Week Behind

If you were anywhere near economic news last week then you likely heard about the October CPI report which showed inflation at a red hot 6.2% YoY. It is getting increasingly difficult to make the argument that the accelerated growth in prices is "transitory" as many projections now see it persisting through to the middle of next year. Goods CPI and used car CPI both jumped again, up 1.0% MoM and 2.5% MoM, after appearing to cool in September. In essence, we've returned to where we were in the summer, but this time energy prices are up 30.0% YoY leading to an even higher headline number.

Following higher prices, investors responded in the bond market as a bearish week in trading saw shorter-term Treasury yields rising: the 2-year note closed around 52 basis points after opening the week around 42 basis points. This seems to be the Treasury yield that is responding the most to inflation volatility.

This is not necessarily a harmless phenomenon. The rise in short-term interest rates has outpaced longer-term interest rates like the 10-year yield. As a result, a famous recession indicator, the 10-year rate minus the 2-year rate, has begun to trend downward after peaking in March then October of this year. Two forces are behind this move. The main one is an elevated short-term inflation rate which has pushed investors to expect rising rates sooner than previously thought. Updated economic projections from the Fed in December could strengthen this force.

The other force pushing short-term yields closer to long-term yields is a growing feeling that supply chain disruptions could lead to "lost" growth instead of "delayed" growth. Take the often updated forecasts from Wells Fargo. In June, it forecasted growth of 7.3% in 2021 and 5.8% in 2022. As labor and goods shortages intensified, growth was downgraded for BOTH years, 5.5% in 2021 and 4.1% in 2022 per November projections. In total, Wells Fargo has taken off 3.5% worth of growth as a result of supply chain effects (see Chart of the Week). In recent months, the bank has initiated its forecast for 2023 growth around 3.3%, strong but nothing that suggests that robust post-pandemic growth has been delayed for two years.

The November UMich Index of Consumer Sentiment faceplanted to the lowest level in a decade at 66.8, drops of -6.8% MoM and -13.1% YoY, with inflation weighing on consumers' propensity to buy. Readings of current conditions and expectations both fell at a similar pace. With private consumption a key driver of growth, low consumer sentiment points to growth being more "lost" than "delayed" in the post-pandemic period. Losses in durable goods spending on homes and vehicles are set to intensify.

Last week seemed like a week of bad news and investors could feel it with bonds and equities on a small leg down. We've also seen the Biden administration's popularity take a dive to new lows. Only 41% of respondents give Biden their approval, down -11% from the Spring, and even Democrats' approval, which was at 94% in June, has started to turn, down to 80% in November. The US population is losing faith in institutions, and optimism is scarce. The sooner supply disruptions ease the better.

Chart of the Week

From Wells Fargo

Based on Wells Fargo's US outlooks, the total amount of forecasted growth in 2021 and 2022 has been on the decline since June. In just 5 months, expected US GDP growth over the next two years has fallen -3.5%. Is this growth lost forever?

The Week Ahead

The Week Ahead: Retail sales and industrial production will make for a tense Tuesday as they will likely bring further context to supply disruptions' effects on the US. Outside of the US, the ONS will report on CPI. The consensus estimate sees CPI jumping to 3.9% YoY, up from 3.1% YoY. The BoE notably delayed a rate hike at its last meeting, and a CPI move like that would leave many questioning its policy path.

FOMC Tapers While Trade and Employment Flash Mixed Signals

Jacob Hess
November 07, 2021

The Week Behind

That's that. Tapering has begun. As many expected, the FOMC announced the beginning of the end of its asset purchase program on Wednesday to cap the November meeting in which FOMC members determined that the economy had made "substantial further progress" towards the Fed's goals. The long awaited announcement served as a signal that the economy has recovered enough to be taken off of life support. To support the Fed's decision, a strong jobs report pointed to another drop in the unemployment rate, down -0.2% to 4.6% in October.

On inflation, Chair Powell and company are still appearing to take a pass. The biggest shift in the FOMC statement text was an adjustment to the wording of the sentence that summarized the committee's inflation expectations. The September press release described the forces that are creating elevated inflation as "transitory factors." In the October release, it seemed that the FOMC backed off the transitory narrative for a moment by noting that elevated inflation is reflecting "factors that are expected to be transitory." The shift in phrasing likely reflects the rise in inflation projections seen in the September meeting and another rise in the PCE Price index in September (up 4.4% YoY vs 4.2% YoY in Oct). Whether or not these things will cause the path to rate hikes to shorten, right now, is anyone's guess. There are still a lot of roadblocks to a safe post-pandemic landing. Wells Fargo ended the week with a commentary piece asking the question on everyone's mind "when will the shortages end?"

Powell and fellow FOMC members' hawkishness leans on the strides the labor market is making towards full employment. The addition of 531,000 jobs in October is a strong improvement on September, and a sign the effect of the Delta variant is falling away. This was also evident from an auxiliary question in the survey where only 3.8 million people reported that they had been unable to work because their employer closed or lost business due to the pandemic, down -1.2 million from the previous month. Job gains were, again, dominated by the leisure and hospitality sector, but other sectors kept up with solid job gains. Expect to see further gains in leisure and hospitality with wages up a whopping 11.2% YoY there in preparation for Thanksgiving and Christmas. Consumers will almost certainly be paying for these wage increases with more expensive holiday services.

The September US trade report that came out last week detailed a substantial increase in the US international trade deficit in September. The deficit was driven by a -4.7% decrease in goods exports which was a result of a -9.9% decrease in industrial supply exports, another symptom of the slowdown in US industry. Strong demand supported imports which grew 0.6% on the month boosted by capital goods and industrial supply goods. It seems, at the moment, with the US ahead of most economies on the recovery, foreign trade partners are enjoying a strong US consumer. The deficit will continue to weigh on growth until the rest of the world can catch up and capacity pressures ease.

Chart of the Week

From FRED

The US trade deficit has reached new highs in recent months as exports fail to keep up with imports. The trade imbalance is likely to ease when supply disruption eases pressure on the cargo shipping.

The Week Ahead

Economic news rolls in relatively quietly next week. The biggest reports will feature updates on US and German inflation as well as an update on job openings. The NFIB survey will also describe the status of small businesses which have been struggling with high input prices and labor shortages.

Delayed or Disappearing Growth?

Jacob Hess
October 31, 2021

The Week Behind

It was a wild week of reporting for the global economy with several countries releasing Q3 2021 GDP data. The US led on Thursday with the BEA's report then France, Germany, and Italy followed on Friday along with a summary of euro area GDP growth from Eurostat. The releases reflected a quarter where global supply disruptions dominated economic news, and the disruptions have led to a clear slowdown in economic activity, especially in the United States.

Growth expectations for the US were pared back throughout the year as the COVID recovery looked to be in danger, but even the latest projections turned out to be too optimistic. At just 2.0% QoQ SAAR in Q3 2021, the advance estimate of US GDP swung lower than many forecasts. Some notable misses include a 6.8% QoQ SAAR estimate that was the median estimate of the Philadelphia Fed's Survey of Professional Forecasters, a 3.4% QoQ SAAR estimate by TD Bank made in September 2021, a 3.5% estimate by the Conference Board on October 13th, and a 3.0% estimate (the closest of the bunch) by Wells Fargo on October 14th. As evidenced by the trajectory of projections over time, a healthy pessimism had been growing quickly throughout Q3, but it wasn't strong enough to lead the experts to a more accurate reading of the economic slowdown.

The disappointing 2.0% GDP growth was primarily driven by a huge decline in goods consumption which fell -9.2% QoQ SAAR in Q3 after surging 27.4% and 13.0% in Q1 and Q2. It was fewer big ticket item purchases that dragged GDP down as a combination of durable goods inflation and drained excess savings muted demand. The recovery in service consumption, up 7.9% QoQ SAAR was not enough to boost overall personal consumption as much as forecasts forsaw. However, this gap was larger than expected as the service recovery was once again delayed by input price inflation and a service industry labor force reluctant to return to the status quo. The net export portion of GDP also took a hit from supply disruptions with a -5.1% drop in goods export and a 44.4% increase in services imports boosting the trade deficit.

The Q3 2021 growth picture in the euro area was more positive than what was reported in the US. Eurostat showed growth of 2.2% QoQ and 3.7% YoY in Q3 which was actually a slight improvement on some forecasts: ING Economics expected a 3.5% YoY growth rate in the third quarter in its October forecast and Deutsche Bank projected growth of 1.8% QoQ. A positive Q3 is likely to be overshadowed by a cooler Q4 when disruptions from energy shortages and input cost inflation have more of an effect on the euro area. A strong Q3 was also supported by bounces in France up 3.0% QoQ, Italy up 2.6% QoQ, and Austria up 3.3% QoQ as they recovered from late quarterly GDP declines in Q4 2020.

Last week's GDP reports could end up shifting the narrative that the Fed and other financial organizations have built so far. What began as "transitory" disruptions leading to a "delay" in the recovery could devolve into permanent setbacks that could disappear potential growth. This would be a major issue for developed central banks that have normalization plans based around the "transitory" narrative. The Fed, ECB, BoE, et cetera can hold off on moving in response to rising prices if growth stays at recovery pace, but "stagflationary" pressure would force a delay in monetary policy normalization.

Chart of the Week

From FRED

The story of the quarter: goods consumption is pulling back sharply as prices rise and manufacturing stalls, but service consumption is still way off track.

The Week Ahead

The November FOMC meeting begins on Tuesday this week, and many expect the committee to start the tapering process that has been prepared for some time. GDP was slightly disappointing last week, but it's likely not enough of a setback to negate a tight labor market that the FOMC members believe has seen "substantial progress." There will also be an update on October employment at the end of the week, after the Fed reports, but it will probably not have an effect on monetary policy.

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