Economic Outlook - December 2021
- President Biden has nominated Federal Reserve Chairman Jerome Powell for a second term leading the central bank. The Federal Reserve has reassessed the risk of inflation caused by supply chain bottlenecks. Chair Powell forecasts shortages and bottlenecks will persist well into next year. Given this outlook, the Federal Open Market Committee (FOMC) may raise its inflation target next year from 2% to 3%. The key for the markets will be not where interest rates go in the short term but where rates level out. The FOMC also announced that it would be trim its monthly purchases of $120 billion of Treasury and agency mortgage backed securities by $15 billion per month.
- The University of Michigan reported that its consumer sentiment survey fell to 67.4 in November from a final reading of 71.7 at the end of October. The most recent reading was the lowest level since 2011. The drop from July was the third largest in the past 50 years. One-in-four consumers cited inflationary erosions of their living standards in November.
- Strong employment translates to healthy economic activity. Hours worked and pay increases are lifting consumer income. Hours worked increased by an annual rate of 7.0% in the third quarter. With pay increases added in, nominal wages & salaries increased at a 9.9% annual rate. This strong increase in consumer income helps explain why nominal consumer spending increased at a 6.9% annual rate in the third quarter. As supply chain constraints ease, this consumer buying capacity may continue to sustain growth as more sought after goods such as autos become more widely available next year.
- Small business confidence fell for the fifth consecutive month in October as only 26% of small business owners expect the economy to improve over the next year, according to a survey by Vistage Worldwide, Inc. This is down from 66% in May. Hiring challenges have forced small businesses to raise wages and expand benefits and bonuses, negatively affecting overall operating costs. Business owners and consumers point to the Delta variant as cause for lowered optimism.
- Investors are encouraged by the record amount of cash and short-term investment on corporate balance sheets globally. S&P 500 companies currently hold $6.84 trillion in cash equivalents according to S&P Global. This amount is 45% higher than average in the five years preceding the pandemic. Companies can use this cash to build factories, buy back shares, expand research budgets or pay down debt, for example. Supply chain issues and labor shortages have hindered companies’ ability to spend cash.
Sources: Bloomberg LLC, FactSet, The Wall Street Journal, Barron’s
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