Economic Outlook - March 2022
- Wage increases across the last year have risen at a pace not seen in 40 years. The yearly increase in pay jumped up 5.5% at the start of 2022 before slipping to 5.1% in February. Wall Street had expected a sharp 0.5% increase, but hourly pay rose just a penny in February to $31.58, marking the smallest increase since January of last year. It was the biggest surprise of an otherwise strong February employment report and the only disappointing number. Many businesses have said they offered signing bonuses or boosted pay during labor shortages to fill a record 11 million open jobs. We expect additional wage increase pressure, as companies will have to pay more to attract or retain talent, especially with a record number of people quitting for better opportunities.
- The war in Ukraine is likely to boost inflation in the short-run, claimed Fed Chairman Jerome Powell. “We’re going to see upward pressure on inflation, at least for a while,” from higher commodity prices, especially energy costs, Powell said during an appearance before the Senate Banking Committee. Powell said the only question was how long that pressure would last. One worry was that the additional upward pressure on prices could make the public come to expect inflation will continue to rise above the central bank’s 2% target. Fed research says that higher inflation expectations would make it harder for the central bank to bring inflation down. The conflict in Ukraine is also exacerbating global supply-chain woes, Powell said, which will lead to more inflation headaches. We expect inflation will continue to run hot through the first half of the year, possibly moderating to 4% by year-end if supply-side constraints are resolved.
- The Institute of Supply Management [ISM] barometer of business conditions at service-style companies such as hotels, retailers and restaurants fell 3.4 points in February to a one-year low of 56.5%, reflecting still-severe shortages of supplies and labor that are hampering the economy. Economists had forecast a reading of 61% in the Institute for Supply Management’s services index. Numbers over 50% are positive for the economy and anything over 55% is exceptional, but the index has fallen for three straight months. Omicron COVID variant disrupted the economy in December and January, but cases are falling fast, allowing businesses and consumers to resume normal activities. Service-oriented companies that now dominate the U.S. economy have generally fared worse during major viral outbreaks. Their workers deal directly with customers and their businesses are more affected by government restrictions. We expect conditions for business to improve in future months as cases have significantly declined.
- The ISM report also showed that ongoing shortages of materials and labor continue to hold back growth and prevent a full recovery. These shortages have also forced businesses to pay more for supplies and charge customers higher prices in return, contributing to the highest U.S. inflation in 40 years. As a result, while nominal wages have risen, employees are not necessarily better off. The Russian war on Ukraine and prospect of the Federal Reserve raising interest rates soon have also added to high oil prices and rising mortgage rates. We expect GDP will be somewhat lower than initially expected, but still believe a 4% or better rate is likely for 2022, owing to the continued recovery post-recession.
- Orders for manufactured goods rose 1.4% in January, the Commerce Department reported, doubling the expectations of economists. Durable-goods orders rose 1.6%, unrevised from the initial estimate. Durable goods orders are up in eight of the last nine months. Orders for nondurable goods were up 1.2% in the month and demand for nondefense capital goods, excluding aircraft rose a revised 1% in January, up slightly from the prior reading of a 0.9% gain. This strength in demand is usually interpreted as a favorable sign for business expansion, rising GDP, and support for equity market values.
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