A deeper dive

Housing Affordability Erodes After the Pandemic

Jacob Hess
May 12, 2022

Home prices have been increasing consistently since the global financial crisis in 2008-2009. The number of homes sold on the lower end of the price spectrum has declined steadily since 2010 as the median home price increased. Low mortgage rates and a strong labor market supported homebuying in the 10 years that followed. Just before the pandemic began, the percentage of homes that were sold for less than $299,999 was 40%.


During the pandemic, rates dropped to zero, making mortgages even cheaper. Additionally, individuals received stimulus payments in 2020 and 2021 that they couldn’t spend due to COVID-19 restrictions, creating a savings glut. The extra money was used by many to move away from cities towards the suburbs. These trends boosted demand and forced an acceleration in home prices. In the two years following the onset of the pandemic, the percentage of homes that were sold for less than $299,999 was just 16%, a -24 ppt decline in that time period.

A hawkish Fed is about to make housing a lot less affordable as mortgage rates rise while cheap homes become even harder to find. The low supply of homes is unlikely to allow this trend to reverse with home prices still expected to grow this year, though at a slower pace than the blistering pace seen last year.

The US Economy is All Right

Jacob Hess
April 17, 2022

As we all know, the war in Ukraine has surfaced as the primary threat to global growth in 2022. The already inflammatory issues of inflation and supply chain disruptions are expected to worsen for most of the world if not all of it. With the beginning of the conflict taking place at the end of February, all eyes are on March and April economic data to see the initial impact. A first glimpse suggests the impact may be minimal in the US.

Industrial Production Maintains Strong Monthly Pace in March

Industrial production data for March came out on Friday with a strong monthly print of 0.9% MoM. This was the third straight monthly gain of 0.9-1.0% and the second straight for the manufacturing sector. Total capacity utilization also surfaced above 78% for the first time since January 2019 and exceeded the pre-pandemic reading by 2.0 ppts. US industry seemed to be operating normally in March without any disruptions added from the war. Instead, the expansion of industrial capacity continues at a rapid pace to keep up with excess demand.


The rise in energy prices has been the aftershock of the Russian invasion and sanctions that has shaken the US economy, and the industrial production report does reflect that. Oil and gas drilling production saw a strong 4.8% MoM increase in March following three monthly gains of 4.0% or more. This strength helped boost the mining subindex which grew 1.7% MoM. The good news is oil and gas drilling production is up 53.7% YoY after Q1 2022 which bodes well for the cooling of US gas prices. The strong response from oil and gas firms to higher prices dashes fears that they would be unwilling to ramp up production in the face of fundamental changes within the industry.

Empire State Manufacturing Survey Activity Surges in April

The first of many Fed manufacturing PMIs for April also came out last week describing firms' activity in the New York State, the Empire State Manufacturing Survey. These responses were received in the first week of April, about a month and a week from the beginning of the war in Ukraine. The General Business Conditions index saw a huge bounce from -11.8 to 24.6 boosted by a 36.3 pts jump in the New Orders index and a 41.9 pts jump in the Shipments index. This meant firms in New York reverted from a slight contraction in demand and production in March to a strong pace of growth in April. If the negative March numbers were representative of the effects of the war in Ukraine, they were very temporary.

From New York Federal Reserve

If manufacturing firms did see an expansion in production and stronger demand, they saw it at with higher input inflation. The Prices Paid index accelerated to its higher reading of all time in April at 86.4. This was a jump of 12.6 pts from an already elevated reading of 73.8 in March. This was likely due to the surge in energy prices reported throughout March, a consequence of the Ukraine-Russia conflict that will continue to be cited. The situation has also lead to a worsening in optimism for the next 6 months. The forward-looking General Business Conditions index fell -21.4 pts but remained in positive territory at 15.2.

It seems that so far the US economy is doing all right. Of course, there is a lot of data to come through to help better describe the consequences of the war across the globe, but the above two reports suggest positive surprises on the way. This trend would be pleasant news for the FOMC board who is planning a path of policy normalization for the rest of the year. Avoiding potential snags in the next few months could mean the difference between slow growth and a full on recession as the Fed funds rate rises.

CPI: From Transitory to Elevated to Persistent

Jacob Hess
April 12, 2022

The March CPI inflation report did not disappoint with a strong 1.2% MoM increase to an annual rise of 8.5% YoY. Most subindexes did not see any significant growth acceleration and even the used vehicle component saw a -3.8% MoM softening. In fact, the sole culprit for the surge in headline inflation was the Energy index (as expected) which surged 11.0% MoM.

Energy goods prices grew 18.1% MoM, and energy services prices grew 1.8% MoM. Food also experienced a solid increase of 1.0% MoM, but it was in line with what we saw in February. Both were relatively expected. The surprise of the report was the monthly increase in core inflation (ex food and energy) of just 0.3% MoM, the lowest since September 2021. This might have been driven by a -0.4% MoM decrease in the prices of goods (ex food and energy) which likely was driven by the drop in used vehicle prices mentioned above. Services prices were a bit hotter with a 0.6% MoM increase, but the annual gain sits at just 4.7% MoM.

As we close the first quarter of 2022, the inflation narrative has shifted again. The first stage of post-pandemic inflation narrative was the "transitory" narrative in the beginning of 2021 where the relaxation of restrictions was expected to bring on pent-up demand that would translate into demand driven inflation. Goods prices were expected to overshoot a bit, and services prices, which crashed during the pandemic, were expected to snap back into place. Supply chain disruptions brought about the next stage, that inflation would be more "elevated" than previously expected. Prices in both Q3 and Q4 2021 continued to rise on the pent-up demand, but supply chain disruptions stuck around and accelerated increases in goods prices.


The third stage has the Federal Reserve alarmed and ready to move aggressively in the remaining FOMC meetings in 2022. The narrative, as a result of geopolitical tensions and rising inflation expectations, has turned to "persistent." The monthly gains in the CPI report have been elevated for some time, especially in core CPI. The 5-month moving average of monthly changes of core CPI exceeded 0.5% in Q3 2021 and again in Q1 2022. The last time the average reached this level was in 1982.

"Persistent" inflation is forcing the Fed to move swiftly and strongly in rising the Fed funds rate with many expecting a 50 bps hike in May. The bond market has also responded with a rise in short term interest rates that has caused the yield curve to flirt with inversion. This new narrative has demanded a more serious position on price stability from policymakers which has negative implications for US growth.

We Have Lift Off

Jacob Hess
March 16, 2022

Today, we have lift off. The long awaited day where the Fed takes a more hawkish stance against inflation finally came. The FOMC elected today to raise the Federal funds rate target range by 0.25% to 0.25-0.50%, the first time the lower bound has been above 0% since the onset of the pandemic. While the move was expected, it also seemed significant in that the slight tightening is the beginning of a larger move to gradually lift easy financial conditions from the US economy.

Press Release

The FOMC was quick to point to "strong" job gains and "elevated" inflation, references to the committee's dual mandate, as the main drivers behind their decision to raise the Fed funds rate. And while the "highly uncertain" implications of the Russia-Ukraine war exist, they came second to the strength that the economy has shown in the past year. Whether that uncertainty plays a part in the Fed's monetary path remains to be seen, but two things suggest that current conditions in Europe aren't severe enough to rock the boat.

The first is the FOMC's willingness to admit that "ongoing increases in the target range will be appropriate." It might seem like a flexible statement to some, but when the Fed speaks like this, it is essentially issuing a forward guidance on policy. Barring a severe escalation in the war in Eastern Europe, we can expect several more rate hikes in 2022. The second is the near consensus vote on the 0.25% rate hike that only saw one dissenter in Bullard. If the new Ukrainian conflict had altered the intention to hike 0.5% into a 0.25% move, there may have been more push back.

Economic Projections

In addition to the announcement of a vital 0.25% rate hike, the Committee released March projections after three months of mulling over the December projections. And there was clearly a lot of mulling.

  • 2022 GDP Growth: 4.0% -> 2.8%
  • 2022 PCE Inflation: 2.6% -> 4.3%
  • 2022 Core PCE Inflation: 2.7% -> 4.1%
  • 2022 Fed funds rate: 0.9% -> 1.9%

The sharp rise in FOMC members' inflation expectations has had a clear impact on the expected path of monetary policy in the US. As of March, no FOMC member sees inflation easing below 4.0% this year. Last December, no FOMC member saw inflation over 3.0% this year. In the estimates of core inflation, there is a similar trend which turns out to be a subtle admission that inflation is almost certainly broad based and can no longer be blamed entirely on rising energy prices and COVID categories of CPI. As a result of these things, we get an aggressive dot plot projecting at least another 1.0% of rate hikes in the most dovish scenario and as much as 2.75% in the most hawkish.

From the Federal Reserve

Perhaps the most concerning development is the downtick in the median expected US GDP growth of about 1.2 ppts in 2022 with virtually no increase in the expected growth in 2023 and 2024 suggesting that the downward revision is a result of lost growth, not delayed growth. The whispers of "stagflation" should get stronger. However, it should be no surprise that a steep forward rate hike path will come with growing pains in the economy. The real question is: how much has the Fed factored potential effects of the Russia-Ukraine war in this estimate? The answer is likely not at all. Regardless, supply disruptions are occurring already and are weighing on economic indicators that help forecast economic output. The Atlanta Fed's GDPNow model has projected Q1 2022 SAAR QoQ growth at around 1.2% (as of March 17), a fairly anemic rate compared to the "Blue Chip" consensus that started around 3.7% SAAR QoQ at the beginning of the year.

From Atlanta Fed

The main message to glean from the FOMC March meeting is that the Committee is in base case mode. A steady, gradual hiking cycle with steps of 0.25% has always been due in order to fight inflation, but that base case could face realignment as uncertain economic environments develop. The first impression is that the status quo (for the US) is likely to persist, and that realignment is unlikely. Per the base case, another 0.25% in May is on the cards.

Chart Gallery: Russia in the World Economy

Jacob Hess
March 10, 2022

Russia's place in the global economy has been called into question following its choice to invade Ukraine at the end of February. Economic sanctions have been the strongest response by nations who have voiced their disapproval, and the magnitude of the restrictions could collapse the Russian economy (the ruble is down around -64% vs the USD in 2022 as of March 9th). Given how interconnected the global economy is, the looming question is how impactful will the shockwaves from the sanctions and a wounded Russian economy be? Here are 10 charts that describe Russia's place in world markets and which markets could be most affected.

Commodities: Energy


Russia is one of the largest exporters of oil and gas in the world. OPEC estimates that it produced oil and gas at a rate of about 11.2 million b/d, or 10.0 million b/d of crude oil and 1.2 million b/d of condensate/natural gas liquids. As of the time of this report, OPEC estimated Russia would add another 700,000 b/d of oil and gas production by the end of the year.

From S&P Global

Russia was China's second largest crude oil supplier in 2021, accounting for around 15.5% of China's total imports, and delivering 1.6 million b/d of crude oil. The immense consumption of Russian oil and gas by China means it is Russia's largest purchaser of energy goods. Pipelines between the two nations run near full capacity and continue to be upgraded.

From Allianz

Russia's next largest energy customer is to the West. It supplies about 36% of the total EU natural gas supply through pipelines that run through Eastern and Central European nations. That supply has recently come into question as European nations have taken a position against Russia's invasion of Ukraine with some even fearing invasion themselves. Allianz sees the largest energy risks in Hungary, Slovakia, and Czechia where a reduction in Russian supply could threaten consumption and, at the very least, cause a surge in prices.

The risk that this war brings to energy markets through a decline in Russian energy exports has become abundantly clear through the recent surge in oil prices. Brent crude oil contracts threatened to trade above $140 for a moment before settling in the $110-115 range as of March 9th.

Commodities: Food & Metals

From Wells Fargo

In addition to energy commodities, Russia is also a major player in the food and metals markets. Russia produces around 18% of the world's wheat and around 15% of the world's fertilizer chemicals. Its actions are also likely to have an impact on the massive amount of wheat and corn that Ukraine is responsible for producing. A prolonged conflict will have significant ramifications in those respective markets.

From ING

While Russia's food production is significant on a global scale, the brunt of the pain will be felt by its regional trading partners. In particular, nations in the Middle East and Asia Pacific will likely feel the most pain from supply disruptions in Russian food production. The same can be said about Ukraine's top food trading partners which include the Middle East, Asia Pacific, and the EU. This table also suggests that Africa and North/South America are unlikely to be impacted at the same magnitude.

From Northern Trust

Several metals markets will be impacted by supply disruptions that come from conflict or the impending economic sanctions. Palladium is vital for automotive production and is already up 26.9% in the last month. Titanium is a critical component of jet engines in the aerospace industry.

From Wells Fargo

Goldman Sachs' chart puts into perspective how significant Russia is to the food and metals markets. While the large, resource-rich nation is most popularly heralded as an oil and gas behemoth, its contribution to precious metals, industrial metals, and wheat markets are comparable in terms of global importance. However, in terms of GDP and overall world trade, the contributions are smaller.

Trading Partners: EU

From Eurostat

The EU is Russia's largest trading partner, accounting for 37.3% of the country’s total trade in goods. The largest component of the trade is EU's import of Russian energy goods (outlined in charts above). However, another significant component of the EU-Russia relationship is EU exports of machinery, vehicles, and manufactured goods which include vital technology like electronics and energy machinery. The relationship has shrunk in the last decade, but it would still be a devastating economic casualty if sanctions blocked trading between the two nations.

From Destatis

Of all nations to be affected by a stop in EU-Russia trade, Germany and its strong manufacturing sector would be one of the largest. The goods it receives from Russia in its sea ports is almost equivalent to receipts from Sweden and receipts from China combined.

Trading Partners: US

From LPL Research

LPL Financial points out that "Ripple effects from the Russian invasion of Ukraine will be minimal in the U.S. Russia only accounts for roughly 1% of US goods imports." However, this would only protect it from the direct adverse effects of a halt in trading, while surging commodity prices would cause more pain indirectly.

From Office of Technology Evaluation

Trade between Russia and the US is mostly one way Russian exports of (energy) minerals totaling about $8.5 billion. Like EU-Russia trade, there is a significant export of machinery, transportation equipment, and other high-tech goods from the US to Russia. However, the size of those exports is around $3 billion, much lower than the EU exports of similar goods worth €58.6 billion.

Russian Energy Import Ban on the Table

Jacob Hess
March 07, 2022

Oil and gas import bans are now on the table after the first round of economic sanctions have failed to de-escalate Russia's invasion of Ukraine. NATO nations, particularly European nations, were hesitant to push for a ban on energy imports because it would be a self-inflicted wound in the form of surging inflation as energy commodity prices would no doubt increase above their already elevated level.

From EIA

The EIA provided a pretty good explanation why. European gas supplies come from three main sources, the US, Qatar, and Russia, which provided almost 70% of liquefied natural gas (LNG) in 2021. The oil and gas import ban would threaten the 20% share that flows through Russia. In 2021, that was a total of 10.7 Bcf a day imported in Poland, Germany, and Slovakia. The rise of Russia as an importer of gas to Europe is relatively new, but the dependence has developed quickly. Pivoting to other key sources like the US and Qatar would likely be more difficult and take some time due to logistics, but it would be a necessary step if import bans came about.

A small silver lining can be found in the European Union's steps to increase the share of renewable energy use to make progress towards climate targets. It has helped reduce overall natural gas imports fall from a peak in 2019. That fall should continue in the next few years, and now it will could happen at a faster pace given new motivations to wean itself off fossil fuel imports from a warring neighbor. However, renewable resources are not nearly bulky enough to protect the EU nations from the economic pain that would come.

From Russia's perspective, a ban on energy exports deal another crippling blow to its economy and allow for more selling of the ruble. The crashing of the Russian currency could be a replay of the 1998 currency crisis that the nation experienced after it fell badly into debt which led to a default and extreme currency controls by the Russian central bank. Of course in that period, oil was around $25 a barrel and declining, so the power that Russia has as an energy superpower now did not exist then. At the moment, this is the only economic power that could keep the economy afloat so long as it can find buyers for its oil and gas which are trading near record highs.

Home Prices Fly in 2021

Jacob Hess
February 22, 2022

The S&P Global Case-Shiller National Home Price Index reported a 18.8% YoY gain in December which was the same as was reported in November. The levelling off in the annual gain came after the index decelerated in the 2nd half of 2021 from a record high pace recorded in July. The 10-City and 20-City composite indexes both saw monthly gains over 1% and acceleration in their annual gains (up to 17.0% YoY and 18.6% YoY respectively). In the end, these gains make for the strongest calendar year price growth on record.

The FHFA also reported strong price growth of 17.5% YoY in November after a monthly gain of 1.1%. While the monthly gain was well above the average gains seen in the last 20 years, it was a deceleration from earlier in 2021. FHFA senior economist Will Doerner suggested that "the data indicate a pivot." In reality, housing demand is likely not receding, but rather potential homebuyers are becoming more hesitant to accept rising prices. Regardless, all nine census divisions in the US saw price growth above 13% YoY and above 1% MoM in November.


The past two years have been wild for the real estate market with a combination of supportive fiscal and monetary policies and an unprecedented public health situation. Low rates and some extra cash convinced homebuyers to move forward with purchases in late 2020, and many others took advantage of new remote jobs to relocate to more desirable locations. Existing home sales jumped to 5.64 million in 2020 and to 6.12 million in 2021. The surge in demand was met with a squeeze in supply as H2 2021 brought about shortages in building materials that pushed prices higher. As a result, inventories dropped to record low levels, 880,000 at the end of 2021.

Here we are in the real estate market in 2022, and suddenly it feels like there are many reasons for house price growth to struggle. Inflation is almost certainly going to cause a sharp Fed tightening cycle. Home prices are at record highs, and the anticipation of supply chains reconnecting could shade inventory expectations more optimistic. How many homebuyers that would have bought in 2022 made a decision to buy in 2020-2021? These questions suggest deflationary answers, but it almost certainly won't lead to a decrease in home prices in 2022, rather just a slower pace of growth.

We'll be keeping a close eye on the Case-Shiller indexes and the FHFA reports this year, especially in Q2 when interest rate expectations start to shape up as the Fed begins guiding its intentions on rate hikes for the rest of the year. The price of credit will be the main driver of demand. On the supply side, inventory should start to recover once materials become less scarce. Construction companies will be looking to build and sell at these prices, especially given the right conditions.

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.


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%.


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.


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


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.