Commentary Directory

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.