The Independent Market Observer

Monday Update: Economic Growth Accelerates in Q4 2021

Posted by Sam Millette

This entry was posted on Jan 31, 2022 9:40:50 AM

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In his Monday Update, Commonwealth’s Sam Millette consumer and business confidence, the Fed, fourth-quarter GDP growth, and January employment.There were a number of important economic updates last week, with a focus on consumer confidence, the Fed’s January meeting, and the advanced estimate of fourth-quarter GDP growth. The first look at GDP growth in the fourth quarter was a highlight, as the report showed that the economic recovery picked up speed to finish out the year. This will be another busy week of updates, with reports on business confidence and January employment serving as highlights to come.

Last Week’s News

On Tuesday, the release of the Conference Board Consumer Confidence Index for January showed confidence falling by less than expected. The index dropped from a downwardly revised 115.2 in December to 113.8 in January, against calls for a further drop to 111.2. This result echoed the decline in the advance estimate of the University of Michigan consumer sentiment survey for January. Souring consumer expectations caused the drop in confidence, as consumer views on the present situation improved modestly during the month. The slowdown in Covid-19 case growth in January likely contributed to the better outlook on the present situation, while concerns about persistent consumer inflation weighed on future expectations. Looking forward, continued progress on the public health front may support confidence in February. It’s likely, however, that slowing inflation figures will be needed before the index returns to pre-pandemic levels.

On Wednesday, the FOMC rate decision from the central bank’s January meeting was released. As expected, interest rates were not changed at this meeting. Still, the press release and Fed Chairman Jerome Powell’s post-meeting press conference indicated that the federal funds rate is likely to be increased at the next scheduled meeting, which is in March. The Fed put extremely supportive monetary policy in place at the start of the pandemic. The plan to hike rates, possibly as soon as March, indicates that the central bank aims to normalize policy sooner rather than later. Given the post-lockdown improvements for the labor market, as well as the rising inflationary pressure throughout 2021, it’s no surprise the Fed is getting serious about taking some steam out of the economy. The anticipated rate rise suggests the central bank is comfortable with the current health of the economy. As any changes to monetary policy have the potential to affect the markets, however, the situation should be closely monitored.

Thursday saw the release of the preliminary estimate of December’s durable goods orders report. During the month, durable goods orders declined by 0.9 percent, in a larger move than the 0.6 percent drop forecasted by economists. With that said, November’s growth in durable goods orders was revised up from 2.6 percent to 3.2 percent, which helps explain the December result. The drop in headline durable goods orders was largely due to a slowdown in volatile aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.4 percent against estimates for a 0.3 percent gain. Core durable goods orders are often used as a proxy for business investment. Accordingly, it’s notable that December marks 10 consecutive months with growth in this segment, finishing out 2021 with healthy levels of business spending.

Thursday also saw the release of the advanced estimate of fourth-quarter GDP growth. The economic recovery picked up steam to end the year, as the economy grew at an annualized rate of 6.9 percent during the quarter. This result was up from the 2.3 percent growth rate in the third quarter of 2021 and well above economist estimates for 5.5 percent growth. This report marks a notable rebound for economic activity during the quarter, driven by in part by improving personal consumption. Personal consumption grew by an annualized rate of 3.3 percent in the fourth quarter, up from the 2 percent growth rate in the third quarter. Business spending also contributed to the better-than-expected growth in GDP. A sharp increase in business inventories was the largest single contributor to overall growth during the quarter. Looking forward, the pace of economic growth is expected to slow in 2022 and 2023. As this report showed, however, the economy entered the new year with plenty of momentum.

We finished the week with Friday’s release of the December personal income and personal spending reports. The results were mixed, as an increase in personal income contrasted with a drop in spending. Personal income went up by 0.3 percent in December. This rate was down from the upwardly revised 0.5 percent growth in November and below economist estimates for 0.5 percent growth. Personal income has been quite volatile throughout the pandemic, as shifting federal stimulus payments caused large swings in average income from month to month. In December, in line with economist estimates, personal spending declined by 0.6. This drop echoed December’s decline in retail sales growth and broke a nine-month streak of increased spending. Rising medical risks and persistent consumer inflation likely dampened sales at year-end. Looking forward, it’s possible declining medical risks and inflationary pressure in the new year will support a return to spending growth. For the time being, however, this report will be closely monitored.  

What to Look Forward To

On Tuesday, the ISM Manufacturing index for January will be released. This measure of manufacturer confidence is expected to decline slightly from 58.7 in December to 57.6 in January. This is a diffusion index, where values above 50 indicate growth, so the report is set to show expansion for manufacturing despite the anticipated decline. Manufacturing confidence rebounded swiftly following the expiration of initial lockdowns in 2020. Since then, the recovery for manufacturers has been largely steady. With that said, the pace of recovery has been slower for manufacturers than for consumers, which has contributed to the pricing pressure for manufactured goods. Looking forward, high consumer demand is expected to support continued manufacturing growth. In the short term, however, headwinds from tangled global supply chains and rising costs are likely to remain.

On Thursday, the ISM Services index for January will be released. Service sector confidence is also expected to decline modestly, as the index is set to fall from 62 in December to 59.5 in January. This is another diffusion index, where values above 50 indicate expansion, so the expected result would represent continued growth. As was the case with manufacturer confidence, service sector confidence rebounded swiftly following the expiration of initial lockdowns in 2020. The rebound continued in 2021, as the index was buoyed by improving public health measures allowing consumers to go out and spend freely. Historically, high levels of business confidence have supported faster business spending. In 2021, we saw that relationship hold, with business confidence and spending showing notable strength throughout most of the year.

We’ll finish the week with Friday’s release of the January employment report. Economists expect to see a slowdown in headline job growth. The forecasts are for 175,000 new jobs, compared with the 199,000 jobs added in December. Despite the anticipated drop in hiring, this report would represent 13 consecutive months with job growth if estimates hold. The unemployment rate is expected to remain unchanged at 3.9 percent, matching the pandemic-era low. Fed Chairman Jerome Powell recently declared that the job market remains in very strong shape and is at or near full employment. The expected results for January employment are very encouraging, given the unprecedented headwinds for the labor market created by the pandemic. Looking forward, given the impressive progress we’ve already made in getting folks back to work, the pace of future gains is likely to be more modest.

That’s it for this week—thanks for reading!

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