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Calculated Risk

The Labor Department’s JOLTS report showed the labor market as tight as ever in January, which could be bad news for new job creation in Friday’s Labor Department unemployment report.

Employers can’t hire enough employees in several industries, with the largest increase in openings in accommodation and food services (+133,000), information (+40,000), and nondurable goods manufacturing and state and local government education (+31,000 each). Job openings decreased in finance and insurance (-89,000) and in wholesale trade (-48,000).

It means there is still a huge gap between the supply of workers willing to work and what businesses have been able to hire in many industries.

“The number of job openings was little changed at 10.9 million on the last business day of December, the U.S. Bureau of Labor Statistics reported today. Hires and total separations decreased to 6.3 million and 5.9 million, respectively. Within separations, the quits rate was little changed at 2.9 percent. The layoffs and discharges rate was little changed at 0.8 percent, a series low.”

The growing demand for workers in leisure activities, however, is a good sign that consumers are beginning to venture out as the Omicron variant wanes.

This is while manufacturing activity has slowed ever so slightly per the ISM’s Institute for Supply Management Manufacturing Index, slipping to a 14-month low of 57.6 percent in January from 58.8 percent because of the Omicron variant and ongoing shortages of labor and supplies that have slowed production.

The index of new orders dropped 3.1 points to 57.9 percent, the lowest level in a year and a half, and reflecting higher costs. The supply bottlenecks are reflected in the index of prices paid that rose to 76.1 percent from 68.2 percent in December, erasing some of the big decline at the end of 2021.

The U.S. economy is glowing red-hot now, and maybe overheating with soaring prices if supplies don’t catch up to demand soon. GDP grew 5.6 percent last year, the fastest growth rate in 40 years, and predicted to grow as much as 4 percent in 2022. This is far above the 2 percent average growth rate that prevailed since the end of the Great Recession in 2009.

AtlantaFed

The worker shortage is boosting workers’ wages, per the Atlanta Fed, as mentioned recently by Nobel Laureate Paul Krugman. A 3-month average of hourly wages has been growing at 4.5 percent, more than double the 2 percent rise that prevailed since 2010.

Will inflation cool because consumers spend less in the New Year as the pandemic aid dries up, and supply chains speed up deliveries, or must the Fed raise interest rates in the hope of taming it?

So what happens next?

Today’s ADP private payrolls report showed -301,000 jobs were lost in its January survey that precedes Friday’s unemployment report, with most losses in leisure activities due to the Omicron variant. This will surely downgrade current estimates of an additional 150,000 nonfarm payroll jobs in Friday’s report.

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Popular Economics Weekly

BEA.gov

It looks like the Omicron variant has actually spurred higher growth. The fourth quarter GDP ‘first estimate’ of growth  exploded to 6.9 percent, surpassing most estimates of 5 to 6 percent. GDP got a big lift at the end of last year from businesses scrambling to restock empty shelves in time for the holiday season and warehouses hit by disruptions during the pandemic.

Massive government stimulus spending was a big help as GDP increased by 5.7 percent for the full year, before tapering in the final quarter. That’s the biggest gain since 1984.

The BEA said, “The increase in real GDP primarily reflected increases in private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential fixed investment that were partly offset by decreases in both federal and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.”

Both businesses and consumers spent more, but the 24.5 percent increase in Q4 exports was the biggest surprise. It means other countries are buying more of our products and services, which is in turn a sign that their economies are recovering as well.

And consumer spending that powers two-thirds of economic activity rose a remarkable 3.3 percent in the fourth quarter, vs. 2 percent in the third quarter.

The value of inventories soared by $240 billion — one of the biggest increases in decades — as companies ramped up production to try to meet higher demand.

What does this tell us? That the main cause of inflation isn’t too many Federal Reserve $$ in circulation that has put pressure on the Fed to raise interest rates sooner rather than later.

The BEA noted that government aid has in fact decreased. Inflation should decline as the shortages of workers and supplies are reduced. Businesses will eventually catch up to the demand that is outstripping the supply of goods and services, in part because of new technologies such as 5G communication services coming online and chip shortages that are crimping the production of vehicles as well as other products dependent on said computer chips.

FREDpce

So although inflation is rising at 6.5 percent in December, according to the Personal Consumption expenditure (PCE) price index used by the Fed to measure inflation, businesses are racing to satisfy sizzling demand.

Will inflation keep rising, squeezing consumers, or return to a more normal range this year?

MarketWatch’s Jeffry Bartash says predictions are,

“…that the U.S. will grow strongly again — around 4% or so — in 2022 despite the end of government stimulus, especially if the coronavirus is kept at bay. The chief obstacles? Ongoing shortages of labor and supplies that have boosted inflation to a nearly 40-year high. Inflation-adjusted incomes actually fell at a 5.8% annual pace in the fourth quarter.”

But surging exports are a sign of a worldwide recovery in demand for American products and services, and that the supply bottlenecks will soon be a thing of the past.

It’s as if the Omicron variant is becoming a mere blip on the screen of future growth.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Conference Board

Why are consumers confident of their prospects in January with Omicron still infecting so many, according to the Conference Board’s latest Consumer Confidence survey?

The Omicron variant may be waning, for starters. As of January 19, 2022, the current 7-day moving average of daily new cases (744,616) decreased 5.0% compared with the previous 7-day moving average (783,922). 

Covid Tracker

And there are plenty of available jobs with rising salaries. There were 10.6 million job openings at the end of November, reports the Labor Department.

“Reuters said of the Conference Board survey: “The job availability indexes remained near the exceptionally strong levels of recent months, and perceptions about current business conditions in general improved.  Other household sentiment indicators on balance have been softer this month, but that gloom did not extend to the Conference Board survey.”

The share of consumers planning to buy a motor vehicle over the next six months was the largest in six months. Buying intentions for household appliances like television sets and refrigerators also rose, though plans to purchase washing machines and clothes dryers fell, according to the survey.

So, consumers are still in a spending mood. The US Census Bureau reported last week that retail sales were up 14.4 percent YoY in December, seasonally adjusted.

The Omicron variant and high inflation (and rising interest rates) are still worrisome to consumers, however. Inflation as measured by the retail CPI index has risen 7.1 percent in December YoY, its highest rate in 40 years.

And the financial markets are worried about effects of a possible war in Eastern Europe that could slow growth in the European Union.

So what is keeping consumers in the game, from not crawling back into their winter shelters with so much to worry about? Maybe it is fans wanting to attend their favorite athletic events again, such as the upcoming Super Bowl! Why are football stadiums packed, even with freezing temperatures, as in Green Bay with snow on the ground?

Americans seemed to want to return to a more normal way of life, amid growing evidence that the worst of the pandemic is over.

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Financial FAQs

FREDretailsales

Sales at U.S. retailers such as Target and Amazon sank 1.9 percent in December — the biggest drop in 10 months — as the Omicron variant spread like wildfire and shoppers confronted higher prices and shortages of some popular products.

Yet they were up 14.4 percent YoY in December, seasonally adjusted, as shown in the FRED graph. Retail sales are still booming, so what should we worry about in 2022?

There are two reasons to worry: the Omicron variant and rising inflation (hence interest rates). Inflation as measured by the retail CPI index has risen 7.1 percent in December YoY, its highest rate in 40 years.

But they are really connected, and curing the Omicron variant will also cure the inflation problem.

CovidTracker

And as of January 12, 2022, the current 7-day moving average of daily new COVID cases (782,766) increased 33.2% compared with the previous 7-day moving average (587,723). A total of 63,397,935 COVID-19 cases have been reported in the United States as of January 12, 2022, so Omicron infection rates have yet to come down.

The high inflation rate is causing the Fed to begin to tighten credit with the first of its predicted interest rate hikes in March. But not everyone is in agreement with that move.

Chinese President Xi Jinping, of all people, asked Fed Chair Jerome Powell at the Davos Switzerland virtual economic summit to please not lift interest rates just yet!

“If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it,” said Xi, according to a transcript of his remarks on Monday.

(China is gearing up for the Winter Olympics and doesn’t want our Federal Reserve rocking the economic boat right now.)

I don’t believe inflation will be as much of a problem this year because experts expect Omicron variant infections to quickly subside by mid-year, so-much-so that it will become more flu-like in its effects and be treated like an annual problem.

Inflation won’t be the problem it was in the 1970s, since it came on so suddenly due to the pandemic that caused the shortage of goods, rather than from a decade-long wage-price spiral.

The Omicron variant is the culprit keeping people from returning to work, and countries from untangling their supply chains.

So no, this isn’t the time to worry about inflation, which is a sign of robust economic growth and consumers with lots of savings from the pandemic aid packages.

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Popular Economics Weekly

MarketWatch

It is uncanny that just 199,000 nonfarm payroll jobs were created in one Labor Department establishment survey, while a separate and smaller household survey showed that 651,000 people found jobs in December after a 1.1 million gain in November.

This kind of variability is typical when the U.S. economy is nearing full employment. That and the soaring inflation rate (6.8 percent of late) show that the demand for goods and services is far outstripping supply at the moment.

The unemployment rate dropped to 3.9 percent from 4.2 percent—just above the fully employed 3.6 percent level before COVID-19 shut down the economy. So, the American economy is close to full employment even with the Omicron variant still scaring workers from returning to work.

The other question is when will producers catch up to soaring demand because the U.S. economy is showing a classic case of overheating at the moment.

Calculated Risk

The above Calculated Risk graph shows how quickly we have closed in on full employment—much faster than the 2001 and 2007 recessions (blue and brown lines in graph), for instance.

Supply will have a chance to catch up to demand and tame inflation when the Omicron variant is tamed.

The U.S. economy regained 6.5 million jobs in 2021, but employment is still short of the pre-pandemic peak by almost 4 million jobs. The U.S. employed 152.5 million people just before the pandemic erupted. Total employment rose to 148.9 million at the end of last year

Average hourly pay has risen 4.7 percent in 2021, which tells us that companies will pay whatever it takes to hire more workers.

Where are they hiring? Leisure and hospitality added 53,000 jobs, which means more people are eating out and traveling over the holidays. Professional businesses hired 43,000 people, manufacturers added 26,000 jobs, construction employment rose by 22,000 and transportation and warehouse firms beefed up payrolls by 19,000.

It’s good news that Americans are continuing to return to work and the economy is nearing full capacity. Let that picture sink in before the Fed begins to raise interest rates, which would slow more job growth.

So, we should begin to enjoy the fact that this economic recovery has just begun, rather than worry about its growing pains.

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen