As holiday consumer spending surges, the Federal Reserve plans adjustments for the recent colossal inflation. After inflation hit a 30-year high in October, it did so immediately again in November 2021. Overall, the month flooded the markets with economic news.
Holiday Consumer Spending Surges with Inflation
The latest inflation report matched expectations as holiday consumer spending surges. Thus, investors remain concerned. Throughout the past year, they have debated the long-term implications of inflation. Some believe that the coronavirus pandemic catalyzed short-term disruptions. Others, feel that the United States economy forecasts persistent inflation for years.
Consumer Price Index
Analysts closely watch the Consumer Price Index (CPI). In general, CPI indicates inflation levels by examining price changes for a broad range of goods and services. Meanwhile, core CPI excludes the volatile food and energy components. Additionally, core CPI provides a clearer picture of the longer-term trend. In October 2021, Core CPI rose 4.6% higher than a year ago. This jumped up from an annual rate of increase of 4.0% last month. Also, core CPI reached its highest level since 1991.
Similarly, the Fed relies on the core Personal Consumption Expenditures Index (PCE) as its go-to inflation indicator. In October 2021, core PCE increased 4.1% higher than a year ago as holiday consumer spending surges. While this matched the consensus forecast, core PCE improved 3.7% last month. Simultaneously, core PCE achieved its highest annual rate since 1990. For comparison, readings fell below 2.0% during the first three months of 2021.
There are many reasons why the annual inflation rate jumped from the readings below 2.0% seen earlier in the year. Some of these entail the tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions. In addition, the United States economy continues to see a massive supply shortage across industries. With these shortages, many items saw enormous cost increases. For instance, used car prices soared 26% higher than a year ago.
As mentioned, Fed officials and economists conflict about the recent inflation spike. Currently, evidence compounds to support that the inflation reflects long-term, structural changes. Because of this, investors moved up their expected timeline for Fed rate hikes. Investors anticipate the first rate hike to take place around the middle of 2022.
Fed Tapering Bond Purchases
In response to this report and other recent signs of higher inflation, investors pulled their expected timeline forward. Now, investors anticipate that the Fed will raise the federal funds rate sooner. Investors forecast that there is about a 50% chance that the first rate increase will take place by May. In addition, they believe that there is a 50% chance that there will be a second rate hike by the end of next year.
According to the Fed meeting statement, it will begin to taper its $120 billion per month of bond purchases by $15 billion per month beginning later this month. Ultimately, this fit right in line with expectations.
Concurrently, officials hope that inflation eases from current elevated levels. They believe this occurs once supply chain disruptions resolve. Beyond that, the Fed offered little guidance regarding its exact timing. Currently, the timeline is for it to vaguely take place in the middle of 2022.
Job Gains Exceed Expectations; Unemployment Rate Declines
As holiday consumer spending surges, the Employment report modestly exceeded expectations. Against a consensus forecast of 450,000, the economy gained 531,000 jobs in October 2021. Additionally, analysts revised prior months by adding, 235,000 jobs. Many industries felt the job gains, particularly the leisure and hospitality sectors. It is ironic because leisure and hospitality suffered greatly during the early days of the coronavirus pandemic.
On a related note, the unemployment rate declined from 4.8% to 4.6% in September 2021. Overall, the unemployment rate declined below the consensus forecast of 4.7%. With more positive news on the way, average hourly earnings rose 4.9% higher from a year ago. Average hourly earnings indicate wage growth throughout the United States labor market. Not only were the most recent average hourly earnings 4.6% higher from the previous month, they also reached their highest level since February 2021.
JOLTS Report Shows Tight Labor Market
Despite job gains exceeding expectations, the latest JOLTS report reflects a tight labor market. The JOLTS report, or Job Openings and Labor Turnover Survey, showed a massive 10.4 million job openings in September 2021. This numbers nears the recent record-high statistic. Now there are more than three million additional job openings compared to January 2020, prior to the coronavirus pandemic.
A high level of job openings reflects a strong labor market. Generally, companies struggle to hire enough workers with the necessary skills when workers feel that it is easier for them to find a job. More to the point, a record high number of employees willingly left their jobs in September 2021. Many dubbed this ‘The Great Resignation’. Typically, workers only quit when they expect to find better jobs.
What’s being dubbed ‘The Great Resignation’ has made it difficult on some employers to fill the numerous open positions. For employers, they are experiencing the most difficulty in the accommodation and food service industries. In October 2021, there were 67 unemployed workers per 100 job openings.
Holiday Consumer Spending Surges
Consumer spending accounts for over two-thirds of United States economic activity. Thus, retail sales data represents growth.
In October 2021, retail sales jumped 1.7% from September of this year. Not only this this exceed the consensus forecast for consumer spending, it skyrocketed an impressive 16% higher than 2020. As holiday consumer spending surges, electronics and appliance sales saw noticeable strength. Despite product shortages, consumers showed few signs of slowing down their spending any time soon.
Typically, many retailers perform a significant amount of their annual sales during the holidays. With the soaring inflation, rising COVID-19 cases, and supply chain issues all at play, consumers sought to shop earlier rather than later. Additionally, many consumers work remotely and remain isolated throughout the pandemic. This makes the home life all the more important.
Early December 2021 reports show strong numbers, growing 11.5% compared with the same period a year ago and much higher than many experts predicted. The National Retail Federation (NRF) called it a potentially record-breaking holiday season. The NRF’s economist, Jack Kleinhenze, says people finally have the ability to spend again and are happy to do so. “I think they are in the mood to spend,” he said in an interview.
As has been the case for a few years now, uncertain circumstances continue to throw wrenches into expert’s predictions. Now, the Omicron variant is posing risks to safety amid growing case numbers and causing some places to go back into mask mandates and potentially lockdowns; only making it harder to predict what could occur.
“There’s no crystal ball to provide a definitive answer,” Kleinhenze said. “But the latest data is encouraging and provides useful insights. In fact, the season could turn out even better than we expected.”
Holiday Consumer Spending Surges Despite Supply Chain Struggles
In spite of many economic sectors facing supply chain woes, holiday consumer spending surges. However, the Institute of Supply Management (ISM) recently highlighted the negative effects of supply chain disruptions on the manufacturing sector.
The national services sector index unexpectedly jumped from 61.9 to a record high of 66.7. Meanwhile, the national manufacturing index was roughly flat at 60.8. Levels above just 50 indicate that the sectors are expanding, and readings above 60 are rare. While both reports were very strong by historical standards, supply chain issues not surprisingly played a much greater impact on manufacturing companies. As companies struggle to produce enough goods or to import the necessary parts, many sectors continue to face stalled sales growth. Analysts saw evidence of this in computer programming and banking.
Housing Starts Fall
The United States housing market notoriously faces ongoing housing inventory issues. With the ongoing housing shortage in many regions, the housing starts report gained in importance. Having said that, the latest housing states report displays mixed results.
In October 2021, overall housing starts fell short of expectations with a modest decline from September of this year. Single-family starts fell 4% from the prior month to the lowest level since August 2020. On the other hand, multi-family starts rose 7%. Optimistically, building permits posted solid gains. Building permits indicate growth in the housing sector. The latest building permits report showed solid gains for both single-family and multi-family units.
However, developers and builders confront ongoing challenges. Throughout the pandemic, the real estate scene acted as a haven to rising prices alongside mass shortages for materials, land, and skilled labor.
COVID Numbers Rise Again
Despite the holiday consumer spending surges, rising COVID-19 case counts dominated headlines. Particularly in Europe, the coronavirus pandemic shows no signs of slowing down.
To help reduce the spread of COVID-19, Austria announced that a national lockdown. This raised investor concerns about slower global economic growth. When global economic growth stifles, inflationary pressures reduce and mortgage rates tend to rise. The question is whether other countries will take similar measures.
With case numbers rising, experts attempt to predict and analyze the near future. Especially with the Omicron variant on the loose, many governments plan to initiate their own coronavirus mitigations, including lockdowns. California has instilled a new statewide mask mandate, also. This left experts in a familiar situation of having to assess and predict what is uncertain.
Experts are predicting that the Omicron variant and the new mandates brought along with it could have a moderate impact on the economy early in 2022, but with researchers still uncertain of the variant’s intensity, nobody is able to make concrete projections.
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