After years of trying to drive inflation higher (the elusive 2% inflation target), the Fed’s ultra-easy QE policies as well as plenty of help from the financial side (“helicopter” money, and external fiscal deficits) have helped. target has been accomplished. , overshoot There is a minority! The financial media tells us every day that inflation is at a 40-year high and that the vast majority of people believe a return to the 1970s, years of high inflation levels, is at hand.
That Unpopular “T” Word
Much of the current pace of inflation is a function of supply chain constraints, service sector personnel issues, “helicopter” money and corporate greed – all of which are moment partner (to use the word unpopular).
Delivery Method: The supply chain is still somewhat tense. Continued chip shortages led to Toyota announcing a reduction in production as some of its Japanese factories, and Samsung and Micron have indicated that Omicron will cut production due to the recent Chinese closure of infected areas (Xi’an). While there is certainly a cause for concern, much of the supply side news is upbeat, but we must take cognizance that the pandemic is not over and flare-ups could lead to supply disruptions. Still, here’s the better news:
- Congestion has improved at two of California’s major ports, and since they are now operating 24/7, it appears “normal” may return by the end of February.
- The US ISM Manufacturing Survey shows an order backlog at index level of 61.9 (Nov). While still high by historical standards, it has dropped from May’s all-time high of 70.6.
- Taiwan, Korea, and Vietnam, major chip makers, have all experienced the least delays in six months. The same was true for China before the latest Covid lockdown.
It should be noted that this picture could change abruptly depending on production factors and reactions from governments to Omron or other upcoming COVID variants. For example, the recent Chinese lockdowns of the city of Xi’an (population 13 million) are not yet in the data.
Service area: The financial media reports rapid wage growth in some service sectors as if they are economy-wide. The latest Atlanta Fed wage tracker indicates growing wage issues for the less educated and unskilled (primarily youth) in the services sector that accounts for nearly 20% of the workforce. The other 80%? not much! (See self-explanatory chart at top.)
Service Sector Personnel Issues: Pre-Omicron, service sectors such as restaurants and airlines were again approaching 2019 activity levels. Omicron has had an impact, with Open Table reporting a drop in restaurant bookings over the Christmas holiday weekend and a catastrophe with airline schedules (cancellations). However, with students returning to the classroom in most schools, many working moms have begun to return to the workforce. We saw in the November jobs data that the labor force participation rate for young women has increased, and we expect the December numbers to continue showing such gains.
“Helicopter” money: Much of the current inflation has been caused by the free money policies of both the Trump and Biden administrations. A simple example: A worker in a widget factory creates one widget per day. If turned off, the widget is not produced, but the worker has no income. Supply and demand have both fallen. With free money from the government, the production of the widget did not take place, but the worker still had income, and demand remained. The government created inflation out of a demand/supply imbalance. That is gone now. Helicopter’s last money went out in December in the form of a “child care” tax credit payment (which is actually pulled ahead of 2021 taxes due next April!) Without “free money”, 2022 growth would be affected!
Corporate Greed: There have been reports that corporations are taking advantage of the “inflation narrative” and raising prices (read: “profit margin”) at a faster rate than the cost of inputs because they know customers, due to a “shortage” by the media. Satisfied with. Katha, won’t mind, will apparently be pleased with the product being available. This is a problem that is solved by “competition” in a capitalist economy.
Thus, it appears that, while inflation may pick up for a few more quarters, it will eventually prove to be “not permanent” or “temporary” in the sense of “long-term”. (The word “transient” seems to have gotten a bad name because of the need for “instant gratification,” which is now pervasive in American culture.)
In previous blogs, we’ve written about why we think development will disappoint, including:
- inflation reducing real income;
- Weaker than perceived consumption due to seasonal adjustment factors, driving October and November retail sales upward as the “shortfall” narrative pushed holiday shopping;
- recent increase in layoffs (see chart);
- The Chicago Fed’s national activity index for November fell to half its level in October;
- The Baltic Dry Index, an index of the cost of shipping bulk goods, fell more than -60% from its most recent peak, possibly due to flagging Chinese demand.
Latest data includes:
- A record trade deficit—not just higher, but higher ($97.8 billion in November versus $83.2 billion in October; the consensus was $88.1 billion!). Exports fell -2.2% as foreign demand slowed (slower growth around the world, especially China) while imports grew +4.7% (where the “shortfalls” are). That would be a big subtraction for fourth quarter GDP, especially if December is a repeat, which we consider to be a realistic assumption.
- Pending home sales fell -2.2% m/m in November. Pending home sales are a leading indicator for the housing industry – these are New contract thenassigned Unlike existing home sales which are closing (which take place two to three months after the contracts are signed). As has been the trend for the past few months, the consensus misses to the higher side (+0.8%). Pending sales have now fallen in two of the last three months and in four of the last six. Maybe skyrocketing prices are to blame! It is likely that the continuation of the declining demand trend will halt or reverse the price trend. If so, once again, we will see that the cure for high prices is high prices!
fixed income: The yield curve has flattened – short-term interest rates are rising due to a rapidly moving Fed, while longer-term rates remain stable as the economic outlook is soft. An “inverted” yield curve (short-term rates higher than long-term) always results in a recession. While we’re still not there, a flat yield curve serves as the first warning.
Equity: We end the year with equity markets at or near record highs. But, under the hood, not all are healthy. Economist David Rosenberg points out that a third of the shares in the Nasdaq
History tells us that stocks have given relief, especially after three years of significant double-digit returns. The Fed has made its first baby tightening move with hasher moves scheduled for 2022. Equities generally respond poorly to Fed tightening, and this time, to ease the issue, the Fed will tighten in a slowing economy (if, indeed, it follows). Under the circumstances, a soft landing is highly unlikely.
As we write this, 2022 is just a day away. We don’t know the future. Perhaps inflation calms down before the first rate hike and/or the omicron is less virulent, passes quickly, no new versions emerge, and the pandemic passes (wishes sometimes come true, but often don’t! ). But, back to earth! We really should go with the constraints that say:
- Indexed equity returns are likely to remain soft for several quarters.
- The length and importance of the correction depend on Fed policies; There is an unknown at the moment, so it is best to be conservative and assume that the Fed will raise rates over the next few months.
- A flat yield curve is not positive for economic growth. While short-term rates may rise due to Fed policies, long-term rates are sensitive to economic growth – so our forecast remains “low in the long run.”
Ultimately, inflation and economic growth are most strongly influenced by long-term factors such as demographics, debt and technology (DDT). Short-term issues such as “helicopter money,” government business mandates, and huge federal deficits can stifle economic growth. But as we have learned once again, such actions result in unwanted and growth-hitting inflation. Under current economic conditions, and with current economic policies and consumer outlook, “disappointing” economic growth appears to be the most likely outcome for the 2022 economy.
,Joshua Barron contributed to this blog.,