Surprise Retail Sales Growth!

 Popular Economics Weekly

FREDretailsales

The New Year brought in another surprise. Sales at U.S. retailers such as Amazon and Best Buy jumped 3.8 percent in January. Americans bought more things: cars, furniture, consumer electronics in a sign that consumers are no longer fazed by the Omicron variant.

Why? The Omicron infection rate is fast returning to pre-Omicron levels.

Retail sales have tracked the pandemic, per the FRED graph. It plunged from May to November 2020 as the coronavirus did its worst, up and down with the Delta variant, then plunging again in March 2021 as Omicron hit. Sales began to recover again in December 2021.

The January increase in sales was the largest since last March, when Americans spent a good chunk of their stimulus money from the government.

Auto sales rose sharply for the second month in a row, the government said Wednesday. Auto sales account for about one-fifth of overall retail spending. Other than autos, retail sales still advanced a strong 3.3 percent last month. Sales also rose sharply at internet retailers (14.5 percent), furniture stores (7.2 percent), department stores (9.2 percent) and home centers (4.1 percent). 

 

CDC

And the CDC reported as of February 9, 2022 in its weekly update that the current 7-day moving average of daily new cases (215,418) decreased 42.8% compared with the previous 7-day moving average (376,855). A total of 77,179,255 COVID-19 cases have been reported in the United States as of February 9, 2022.

The surge in industrial production was another good sign. It increased 1.4 percent in January, largely because of unusually cold weather that boosted the output of utilities, reports the Federal Reserve. At 103.5 percent of its 2017 average, total industrial production in January was 4.1 percent higher than its year-earlier level and 2.1 percent above its pre-pandemic (February 2020) reading.

This could be a surprising year and the beginning of a surprising decade, I said last week; if President Biden, the EU, and Vladimir Putin work out their differences.

We should still worry about emerging signs of irrational exuberance in the financial markets and with consumers, which former Fed Chair Greenspan also worried about more than two decades ago. It is pushing the inflation rate to uncomfortable levels.

But can we blame Americans for wanting to celebrate the looming end of more than two years of uncertainty due to the worst pandemic in 100 years?

Harlan Green © 2022

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

What Makes Americans Happy?

 The Mortgage Corner

Why do economists and pundits like to focus so much on consumer confidence, which fluctuates wildly, as the U Michigan sentiment survey graph shows? It rose as high as 112 in February 2000 during the heady Clinton years, when the cold war with Russia seemed to be over, and has fallen to 61.7 in its February take while the Omicron variant is still rampant.

UnivMichigan

The gray bars portray recessions, and so it shows how consumers see themselves before and after recessions. Right now, it’s the double-whammy of Omicron and high inflation they say worries them most.

“Sentiment continued its downward descent, reaching its worst level in a decade,” said its chief economist, Richard Curtin, “falling a stunning 8.2% from last month and 19.7% from last February. The recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government's economic policies, and the least favorable long term economic outlook in a decade.”

So how does that square with actual economic conditions? Not very well. The US economy expanded at its fastest pace in 40 years last year—6.9 percent in December and 5.7 percent for all of 2021—with consumers spending like there was no tomorrow.

And more than 6.7 million jobs were created in 2021 with 1.62 million jobs added in just the past three months.

FREDcpi

The inflation rate itself has fluctuated as much, especially the Consumer Price Index for retail prices (per FRED graph), which the Federal Reserve pays less attention to because of its volatility.

So why such pessimism about their economic conditions, when the Fed and most economists maintain the current inflation rate is mostly due to the ongoing pandemic and should begin to subside by mid-summer?

The University of Michigan survey team attempted to explain the divergence from reality last year in a terrific report entitled, The Partisan Economiy. It’s largely because of events that have overwhelmed our broken political system.

“Two developments have been responsible for the rise of the partisan economy: growing income inequality and the repeated crises whose solutions demanded extraordinary governmental intervention (9/11 for Bush, the Great Recession for Obama, and the covid pandemic for Trump and Biden).

“Unfortunately, the size of the partisan divide in expectations has completely dominated rational assessments of ongoing economic trends,” the report continues, “This situation is likely to encourage poor decisions by consumers and policy makers alike. While there have always been differences in preferred policies, the overwhelming size and persistence of the partisan gap has generated substantial economic uncertainty.”

It is convenient to blame covid, but I prefer to blame something just as real; the abysmal level of current political discourse among our political leaders that resulted in the January 6 attempted insurrection.

Until our leaders find a common language that both political parties understand, consumers will continue to lack confidence in government and a more favorable economic outlook.

Harlan Green © 2022

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

Inflation is Not So Scary

 Financial FAQs

FREDcpi

It can be no surprise that retail prices have risen 7.5 percent in a year. COVID-19 has scared financial markets and some 3 million workers from returning to their pre-pandemic jobs. The question is what can be done about it?

“The all items index rose 7.5 percent for the 12 months ending January, the largest 12-month increase since the period ending February 1982, said the BLS. The all items less food and energy index rose 6.0 percent, the largest 12-month change since the period ending August 1982. The energy index rose 27.0 percent over the last year, and the food index increased 7.0 percent.”

Part of the confusion is what has made this inflation surge unique. Studies show that it’s mainly worker shortages due to Omicron, countries slow to recover that are part of the disrupted supply chains, and consumers with lots of savings due to the pandemic aid.

The hope is that the Fed can tame some of the inflation by raising interest rates, making borrowing more expensive, which is the conventional tool to cool down activity.

Covid Tracker

But the ultimate inflation cure is if and when the Omicron and any other COVID-19 variant eventually morphs from a pandemic into an endemic virus, like the flu.

In fact, Omicron variant infections are declining faster than expected. As of February 2, 2022, the current 7-day moving average of daily new cases (378,015) decreased -37.6 percent compared with the previous 7-day moving average (605,735), reports the CDC’s Covid Tracker. Omicron infections are sharply down from the more than 800,000 at its peak in January.

At this tempo, it could be back to last October’s rate of approximately 100,000 daily new cases in March, per the CDC graph.

More good news is that the U.S. added 467,000 jobs in January and hiring was much stronger at the end of 2021 than originally reported, The U.S. added 510,000 jobs in December instead of 199,000. And employment rose by 647,000 in November compared to the prior estimate of 249,000.

That’s 709,000 more jobs added to nonfarm payrolls in the past two months, so more workers are returning to work. Leisure and hospitality jobs are increasing, which also means more consumers feel free enough to lead a more normal lifestyle.

There are many parts to the inflation puzzle, but it’s probably safe to say that once the fear of Omicron begins to subside and more economic activity kicks in that will further boost employment—such as from infrastructure spending over the next five years that repairs and upgrades the roads, bridges, energy grids, and water systems, inflation will subside.

That leaves the housing problem with soaring rents as well as housing prices. Approximately one-third of the CPI Index is rising housing costs, a much more difficult problem to solve with the current housing shortage. So perhaps the best cure for lingering inflation should be more $$ invested in housing?

I think we should call the next Build Back Better bill, the Build Back Better Housing bill, if we are really serious about wanting housing to be more affordable.

Harlan Green © 2022

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

Surprise January Job Growth!

 Popular Economics Weekly

MarketWatch.com

In another surprise that will confound the pessimists who see a looming recession, the U.S. added 467,000 jobs in January and hiring was much stronger at the end of 2021 than originally reported.

The U.S. added 510,000 jobs in December instead of 199,000. And employment rose by 647,000 in November compared to the prior estimate of 249,000. That’s 709,000 more jobs added to nonfarm payrolls in the past two months.

‘Total nonfarm payroll employment rose by 467,000 in January, and the unemployment rate was little changed at 4.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment growth continued in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing.”

It's easy to see why. Average hourly wages are rising at 5.7 percent, the fastest in decades, luring workers back into the employment fold. This is especially true in the Leisure and hospitality, Education & healthcare, Transportation, and Retail sectors where 295,000 jobs were added.

So, companies apparently ramped up hiring just as effects of the Omicron variant are subsiding.

Actually, this hiring surge shouldn’t be such a surprise, since GDP grew at 5.7 percent last year, a 40-year high. The economy is running red-hot, but more employees returning to work will begin to bring down inflation.

In fact, could it be that the Omicron variant is subsiding faster than expected? The U.S. is reporting an average of 354,399 new COVID-19 infections a day, sharply down from the more than 700,000 in mid-January, according to a Reuters analysis of official data.

Covid Tracker

It looks like the Omicron variant has actually spurred higher growth, as I said last week. Fourth quarter GDP growth exploded to 6.9 percent, surpassing most estimates of 5 to 6 percent, as 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.

This could be a surprising year, and the beginning of a surprising decade. There hasn’t been this much support for governments and working folk for decades, maybe even since the New Deal.

Harlan Green © 2021

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

Q4 Economic Growth Soars

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

 

Consumers Confident in the New Year

 Financial FAQs

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

Has Omicron Slowed Economic Growth?

Popular Economics Weekly

BEA.gov

Surprise, surprise, the latest data show that the Omicron variant has done little damage to economic growth.

The latest predictions for fourth quarter growth are 5-6 percent, more than making up for the 2.3 percent Q3 slowdown, as effects from Omicron’s infection rate wane.

The Atlanta Fed just announced that its Q4 GPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2021 is 5.1 percent on January 19, up from 5.0 percent on January 14. This is the most up to date prediction.

They attributed the growth adjustment to “…this morning’s housing starts report from the US Census Bureau (a very large increase).”

Privately‐owned housing starts in December were at a seasonally adjusted annual rate of 1,702,000, said the Census Bureau. This is 1.4 percent above the revised November estimate of 1,678,000 and is 2.5 percent (±13.8 percent) * above the December 2020 rate of 1,661,000.

Calculated Risk

As many as 1,800,000 units were authorized at the height of the housing bubble in 2006. And an estimated 1,724,700 housing units were authorized by building permits in 2021, close to the 2006 high, which was 17.2 percent (±0.6 percent) above the 2020 figure of 1,471,100. So, builders are racing to catch up to the soaring demand for housing, which is already boosting economic growth

And the Conference Board Index of Leading Economic Indicators (LEI), made up of 10 economic indicators such as interest rate trends, building permits and manufacturing new orders that purports to predict growth six months ahead, rose 0.8 percent, also a very large number.

“The U.S. LEI ended 2021 on a rising trajectory, suggesting the economy will continue to expand well into the spring,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first quarter, headwinds from the Omicron variant, labor shortages, and inflationary pressures—as well as the Federal Reserve’s expected interest rate hikes—may moderate economic growth.”

Where is that moderation most expected? Nobel Laureate Paul Krugman has pointed out several times that red states have lower vaccination rates than in the blue states, where Omicron infection rates are highest among the unvaccinated. It’s Republicans wanting to oppose anything the Biden administration is doing. And in doing so, it will cost more lives and slower job growth among their own constituents.

However, the need to vanquish COVID-19; or at least tame it so that it acts more like a seasonal flu; has united enough Americans to put money where it will do the most good—into infrastructure and family pocketbooks, rather than speculators’ pockets, as was happening before the pandemic.

That said, the $trillions in pandemic aid should mitigate concerns that higher inflation, or the Omicron variant will do much harm to consumers and economic growth in most states. The current inflation numbers are a sign of robust growth, so let’s get everyone vaccinated and the supply chains unclogged.

Harlan Green © 2021

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

 

Retail Sales Stay Strong

 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 retail sales 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 the Omicron variant infection rate isn't subsiding.

And 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 and the shortage of goods, rather than from a decade-long wage-price spiral.

The Omicron variant is 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