Economic Outlook - February 2022
- For most of 2021, Jerome Powell, the Federal Reserve Chairman, stated that increases in inflation were transitory (i.e., temporary). Powell changed his rhetoric in December of 2021. The U.S. Consumer Price Index for All Urban Consumers (CPI-U), which broadly measures inflation, increased 7.0% over the last twelve months. This increase is the highest in the United States since 1982. Before the pandemic, the Federal Reserve was targeting a 2% increase in inflation.
- The Institute for Supply Management reported that manufacturing activity slipped to 58.7 in December, from just over 61 in November. For reference, anything over 50 from the ISM counts as expansion, but this shows that expansion may be slowing. This could largely be due to the lingering effects of clogged supply chains, tight labor markets, and bottlenecks with manufacturers. However, the ISM also noted that new orders had dipped, albeit only slightly.
- In order to combat inflation, the Federal Reserve will begin to raise interest rates in 2022. Across Wall Street, forecasters now expect that there will be four to five (or more) 25 basis point rate hikes this year. Based on the correlation of stocks and 10-year U.S. Treasury bills, increases in rates are not always bad for the stock market. From 1965 to 2009, rate hikes and stocks moved together until yields rose all the way up to 4.5%. Since 2009, however, stocks and rates have moved together until interest rates reached 3.6%, after which they moved in opposite directions.
- Finding workers has continued to be a struggle even though the private sector has a record number of job openings. The U.S. Bureau of Labor Statistics announced there were eleven million jobs available in January. Before the pandemic, there were just over seven million job openings. Demand for workers is widespread and at historic highs. However, the labor market is tight and employers are having to pay more for their workforce to both hire and retain talent. In fact, employers had to spend 4% more on wages and benefits in 2021 versus 2020 – this is the highest increase since 2001.
- Since the depths of the pandemic, consumers and businesses alike have been paying down their debt where they can, or taking advantage of the lower rates to refinance. Due to the availability of low interest rates as the result of the accommodative monetary stimulus from the Federal Reserve, issuance of U.S. investment grade rated bonds almost topped $1.5T in 2021. This is up over 50% from 2020 levels. It is forecasted that the capital markets will still be busy this year, from corporate borrowings and equity issuances, but most likely not at 2021 levels.
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