Weekly Commentary

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.

The Week Behind

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

• -12.8% drop in consumer sentiment…
• 11 votes for tapering…
• 10 year Treasury yield rising…
• 9.6% PPI growth…
• 8.1% increase in exports…
• $70 per oil barrel…
• 6.8% inflation…
• 5.0% PCE price index…
• 4.8% wage growth…
• 3 rate hikes next year (projected)…
• 2.2 million long-term unemployed…
• And a hot, post-pandemic economy…

Merry Christmas!

Chart of the Week

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.

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.

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

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.

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.

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

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.

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

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.

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

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.

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

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.

The Week Behind

A month into the fourth quarter, supply chain disruptions continue to make the headlines in economic news. In the face of it all, firms seemed to be holding up, just dealing with higher input prices. Throughout the summer, manufacturing was humming along with 0.5% MoM and 1.0% MoM gains in June and July before stalling at -0.1% MoM in August. Especially strong was business equipment production which surged 3.6% MoM in July as firms continued to pick up spending in response to surging consumer demand. Capacity utilization gained a vital 1.4% from April to August.

The latest release of the Federal Reserve's industrial production, however, shows that the effects of the disruptions are finally catching up to manufacturers. Production growth crashed -1.3% MoM weighed down by durables and more specifically, automotive products. The motor vehicle and parts industry fell a troubling -7.2% on the month with the persisting issue of the semiconductor shortage. Capacity utilization gave back its gains made since May with a -1.6% drop in mining capacity utilization. The sole bright spot came from a 0.4% MoM increase in business equipment which is up 8.1% YoY, the strongest market group.

The weakest market group, consumer goods (dropped -1.9% MoM in September and up just 1.4% YoY), is not one that you'd want to see struggling in the fourth quarter of the year with the holiday season primed to be a busy one. However, it appears that stores will have to navigate labor and goods shortages to meet consumer demand which is expected to be robust. The post-COVID problem of supply falling short of demand reflected in the latest industrial production release will be on full display. Outlooks are attempting to be optimistic but acknowledge uncertainty.

We start off with Wells Fargo's holiday season outlook which forecasts holiday sales to increase a record 11% YoY despite "inventory shortages" and "note enough salespeople in stores or delivery drivers for e-commerce platforms." However, the guess comes with "a degree of skepticism." In fact, Wells Fargo's projection of 11% YoY actually factors in a slight decrease in sales over November and December since flat growth in those months would actually lead to a 13% YoY gain. This or slightly worse results would not be unusual outcomes since most of the excess savings from government stimulus in Q1 has worn off and is unlikely to have an effect on holiday consumption. In summary, the year is likely to close out on a solid annual sales growth figure, but COVID and supply uncertainty create significant downside risk.

Deloitte's holiday sales survey echoes the concerns for an abnormal holiday season insisting that "a bounce back to pre-pandemic trends is not likely in the works." Average spend so far is up 5% YoY (just short of the 7-9% YoY expected in Deloitte's initial forecast) with a 15% YoY increase in spending on experiences, but this was mostly from gains in high-income groups as (65% planning not to spend are low-income). Retail executives expect the increase in sales to continue through the final two months of the quarter with 73% planning on shoppers to spend more or significantly more. However, they also acknowledge a tougher sales environment. Sixty-four percent are concerned about getting inventory in time, and 53% expect higher product prices. Like Wells Fargo, there seems to be a cautious optimism in Deloitte's survey with consumer resilience expected to be a reliable force.

One of the leading retail industry organizations, the National Retail Federation, also released some insights on 2021 holiday spending. Its survey sees consumers spending essentially the same amount as last year at $997.73 and slightly below the $1,047.83 in 2019. The expected shortfall is in non-gift purchases as spending on gifts and other holiday items near the 5-year average. Consumers know they are in for a tough shopping season (47% expect to have difficulty finding items), and as a result, this year is seeing the highest percentage of shoppers starting before November in the last 10 years. Again, the NRF's insights is one of stability with a nod towards supply weakness.

The theme in these outlooks is centered around a strong consumer being limited by tenuous business sentiment. Shoppers are actively trying to avoid disruptions from higher prices and shaky inventory sentiment by shopping early and online which is a good sign for holiday demand. Regardless, uncertainty from COVID and goods shortages pose downside risks. We maintain our position on cautious optimism and see solid sales growth from last year, near 2019-levels.

Chart of the Week

Holiday retail sales growth over November and December only has a loose correlation to consumer sentiment in those months in data going back to 1992. This suggests that US shoppers are very resilient during this period, and the low 71.4 reading in the mid-October UMich report is likely not going to be indicative of a drop in holiday spending.

The Week Ahead

The BoJ, BoC, and ECB all have monetary policy announcements that will provide insight into how inflation is affecting those central banks' outlooks. We will also get GDP announcements later this week from the US, the EU, and many individual European nations. These have become slightly less important during the pandemic period since high frequency activity indicators have tracked economic activity closely and quickly. Nevertheless, we look forward to more official figures.

The Week Behind

The labor market has been hot since nationwide restrictions eased in the United States, and pandemic concerns took a backseat to a push back toward normalization. A year and a half after the total amount of workers claiming unemployment insurance peaked at 23.1 million, just 2.5 million remain, only 800,000 above the pre-pandemic level on March 2020. Despite continued claims in the unemployment insurance program nearing normalcy, the BLS reported more than 3 million more job openings in August 2021 than in February 2020. There is a serious gap in employment at the moment, and at a time when demand is surging on consumers' excess savings.

It is at these points in time that laborers have the most power over employers. Across industries, companies are dealing with new order growth that is faster than capacity growth. Unfilled orders, especially in manufacturing, are building. Nondefense capital goods (ex-aircraft) unfilled orders were up 9.9% YoY in August 2021 and haven't been this high since 2012. Many of the supply distortions can be traced to shortages in commodities; however, there is no shortage of "for hire" signs. Workers can sense a heightened demand for them and, after historic levels of stimulus from the government, feel that compensation should align with that demand.

Indeed, it's a perfect storm for labor disputes. Many sidelined workers and employed workers (who have been forced to fill the gaps in the workforce) are ready to take action to improve their conditions. Strikes have been threatened are have already started in many industries. The Hill reports that around 100,000 unionized employees have authorized strikes with some currently striking. Here are some of those groups:

• 2,000 Buffalo, NY hospital workers¹
• 700 Massachusetts nurses¹
• 1,400 Kellogg plant Workers in Michigan, Nebraska, Pennsylvania, and Tennessee¹
• More than 24,000 Kaiser Permanente health care workers in California and Oregon¹
• 450 steelworkers in Huntington, West Virginia²
• A one-day walk-off of 2,000 telecommunications workers in California²
• 1,000 Alabama coal miners²
• 400 whiskeymakers in Kentucky²
• 200 bus drivers in Reno, Nevada, were already on strike²
• 2,000 carpenters in Washington (settled)²
• 600 Frito-Lay workers in Kansas (settled)²
• 1,000 Nabisco factory workers at five plants (settled)²
• 60,000 members of the International Alliance of Theatrical Stage Employees (IATSE) authorized a strike with 98% members approving (pending settlement)^{3 4}

Cornell University's New York State School of Industrial and Labor Relations has tracked 254 different labor strikes that have started in 2021 so far with 111 of those in the last three months. In the two years of before (2019-2020), the ILR school tracked only 59 labor strikes. The BLS, which only tracks work stoppages of 1,000 employees or more, has recorded 12 so far in 2021 which is up from 8 in 2020 and so far in line with 20 in 2018 and 25 in 2019.

These labor disputes, if they continue, could contribute to the forces driving above trend wage growth in the US. The latest employment situation report in September saw average hourly earnings of production and nonsupervisory employees up 5.5% YoY up from 4.8% YoY in August. Annualized wage growth for these lower level employees has averaged 4.8% YoY since the pandemic started, well above the 2.9% YoY average from September 2016 to March 2020. At the moment, it seems elevated wage growth will continue as the hot labor market gives workers leverage in an economy wanting desperately to get back to full capacity.

Chart of the Week

As manufacturing orders have rebounded strongly as pandemic restrictions eased, manufacturing employment has not kept up. The ratio of manufacturing orders, new and unfilled, to manufacturing employees has reached its highest point since June 2013 (disregarding a July 2014 outlier).

The Week Ahead

Economic news out of the US slows this week but invites big inflation reports from Canada and the eurozone to take center stage. The Bank of Canada is another central bank that has been grappling with a tapering decision as its own surge in inflation has grown out of the recovery. We will also get a glimpse into manufacturing with IHS Markit Flash Manufacturing PMIs on Friday.

The Week Behind

Three stories drove the conversation about the economy last week as the first full week of the new quarter signaled the start to the end of the year. Congress continued its squabble over the debt ceiling and spending. Energy prices soared in Europe and Asia as shortages threaten near-term activity. Finally, the week ended with a huge jobs report that could have implications for Fed tapering. Throughout it all, the equity and bond market were looking shaky after sell-offs in late September. It seems that the world is trying to maintain a cautiously optimistic outlook as uncertainty intensifies.

The threat of a US federal default will continue to loom until December now. This week, the Senate passed legislation to fund the government through early December after Senator McConnell backed off of a hardline stance to raise the debt limit temporarily. The bill raises the limit by $480 billion, the amount that the Treasury estimates it would need to fund through December. The resolution calmed the markets for short-term Treasury bills. The 1-month bill opened the week above 10 basis points and closed the week around 2 basis points.

In reality, nothing seems to be solved here except that there is more time to work towards a bipartisan agreement. Wells Fargo believes the bill "simply moves the problem from October to December." However, there still seems to be a general sense of denial that any catastrophic could come from this. Moody's Analytics insists that "it is unimaginable that lawmakers would allow the US to breach the debt ceiling." The $3.5 trillion Build Back Better bill is another issue that divides the two parties, and a resolution there could help diffuse debt limit disagreements. However, no one should get their hopes up.

This summer has been all about supply chain disruptions, and what better way to start a new quarter than with an intensifying energy crisis. Fuel and power prices are rising as a result compounding previous issues with inflation. ING points out some supply factors to pay attention to including historically low levels of natural gas storage in Europe and Asia and supplier flows that are not increasing despite rising prices. Despite low storage levels, key OPEC suppliers to these regions are sticking with previously announced production increases in an announcement made on Oct 4th. Production for OPEC+ is set to be around 39.7 mil b/d with Russia included at 9.9 mil b/d. This will be a welcome 2.2 mil b/d hike over OPEC+ August production of 37.5 mil b/d (including Russia at 10.7 mil b/d).

The week was capped off with the last jobs report before the November FOMC meeting, and it did disappoint. The 194k jobs added in September was well below the 500k expected by a Bloomberg survey and the 720k expected by Dow Jones. The unemployment rate still saw a decent drop, down -0.4% to 4.8%, but remains -3.5% below its February 2020 level. Again, we saw another solid decline in permanent job losers, down -236k to 2.3 million, while temporary layoffs remained at 1.1 million for the 2nd straight month. The strongest job gains were in the professional and business services sector (+60k) and the leisure and hospitality sector (+74k), the sectors which also have the highest rates of job openings at 8.1% and 10.7%.

It's encouraging to see continued progress in these areas, and the Fed will undoubtedly use the fact the weakest sectors are still leading job gains as a point in the corner of "progress towards full employment." However, because gains are coming in those industries that are desperate for workers, wage growth has accelerated substantially to 4.6% YoY (the 3rd straight month above 4.0%). Cue further inflationary pressure, but not inflationary pressure that the Fed is likely to pay attention to. Instead, the FOMC committee might see that as a headwind for consumption growth in Q4. Overall, the report is probably not likely to have a major impact on the Fed's tapering decision. The hawkish tilt in the September meeting gives the impression that observing the September jobs report was just a formality.

Chart of the Week

The unemployment rate dropped -0.4% to 4.8% in September, reaching the Fed's forecast for end of year unemployment a whole quarter early. Does this satisfy the central bank's requirements for tapering?

The Week Ahead

Key reports this week come in the middle of the week: JOLTS on Tuesday, CPI on Wednesday, PPI on Thursday. These updates will provide further guidance on the US economic situation for the Fed. German CPI also comes out on Wednesday and will give a helpful look into inflation in Europe. Further developments in the energy markets will be key as well. Early monday Morning, Brent crude oil traded up 2.6% to just above $84.