Real interest rates appear too low for an economy growing solidly, with inflation accelerating. Numerous data series are supporting the idea that the U.S. is in the neighborhood of full employment, but with (still) emergency monetary policy. U.S. weekly jobless claims have likely been affected by seasonal adjustment issues in the past several weeks, but with the 4 week average trending significantly lower, the clear message is that the labor market continues to heal. With more than 11 million current job openings The JOLTS data in October also confirmed the strong economy. This fits with last week’s solid household survey, in particular, the U-6 underemployment rate declining.
Fed Chair Powell has retired “transitory” as a description of U.S. inflation now, which makes sense. The Fed QE taper should accelerate with inflation broadening, in our opinion. If the Fed comes to believe they have overdone bond purchases, quantitative tightening (QT) or changing the structure of the balance sheet holdings could also be discussed for 2022.
The price data is still alarming. There was another surge in the U.S. CPI in November, up +0.8% m/m and +0.5% on the core measure (ex food & energy). The headline CPI hit 6.8% y/y. This is not just a y/y comparison issue: the 36-month annualized CPI pace was up to 3.3% in Nov (well above comfortable levels). True, there was still evidence of bottlenecks with vehicle prices surging. Energy prices also should come down in future reports, given recent global developments. But U.S. rents & owners’ equivalent rents both rose +0.4% m/m in Nov., indicating that “stickier” components are moving up as well.
As we’ve noted previously, looking at U.S. core goods prices, the 2021 price surge is happening after years of these prices not moving at all. Bottlenecks (product, transport, labor) matter. Particularly concerning now would be any indications that firms plan on increasing prices & wages year after year. 2021’s price surge, while extreme, can be excused. 2022 will not have the same leeway.
With inflation where it is, real (after inflation) average hourly earnings continue to trend lower in the BLS data. Consumer confidence remains depressed in the U of Mich data. These two developments are likely connected – “sticker shock” looks to be real, based on these numbers. Stimulus payments have ended, but there was a saving cushion for many individuals. That cushion is starting to ebb as well.
Bottom line: we continue to watch for any updates on the global health situation, which will inform the policy response. Part of the problem has been the shift in spending to goods vs. services (clogging up ports & global supply chains). U.S. services spending resuming could have removed some of this pressure. That looks partly delayed now due to renewed health uncertainly (omicron & govt responses).
Time should continue to help, however. Pharma interventions (eg, vaccines) appear to work vs. severe pandemic disease. “Peak bottleneck” in 2022 should be followed by “peak inflation” as the flow of goods improves & labor supply continues to show up. Any 2022 gain in productivity growth could also help create a pathway to a softer landing.
We can get some real-time information from the yield curve. We can live with a flat yield curve (eg, what happened during the 1995 mid-cycle slowdown period). An inverted curve would still be alarming (as it always is) however.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by FactSet.
Inflation Surge Pushes U.S. Real Interest Rates Deeper In...
By standing still, the Federal Reserve's policy has provided more stimulus to the economy this year.
The Wall Street Journal
What Could Possibly Go Wrong? These Are the Biggest Econo...
Economists have struggled to see ahead in the pandemic. They're upbeat about next year, but could easily get blindsided again Sign up for the New
Companies Upend Plans on Covid-19 Vaccines and Office Ret...
More employers are saying that workers can now stay home for months longer, while some pause vaccine requirements as the Biden administration's directive is blocked.