"Q4 2021 - Gorilla On the Loose"
By: Joseph R. Tranchini, CFA
GROSS DOMESTIC PRODUCT
- Economic growth accelerated in Q4 2021 to a rate of 6.9% (SAAR), up significantly from the prior quarter’s figure of 2.3% (SAAR). This marks the economy’s fastest pace of growth since Q3 2020 when the U.S. Economy technically exited the Pandemic Recession with a 33.8% (SAAR) rebound1,2
- The Personal Consumption component of GDP accelerated in the quarter to a pace of 3.3%, up from the prior quarter’s reading of 2.0%. Although still positive, spending on Services decelerated to a rate of 4.7%, down from the prior quarter at 8.2%. Spending on Goods stabilized greatly in the quarter, having grown at a modest pace of only 0.5% but still much better than the previous quarter when spending contracted by -8.8%. Stabilization in Goods spending appears to have stemmed from stabilization in Durable Goods spending which grew at a pace of only 1.5% but represents a drastic improvement over the prior quarter’s reading of -24.6%. A potential sign of improvement in the ongoing supply-chain issues facing the economy1,2
- The Private Investment component of GDP grew at a rapid pace of 32% in Q4 2021, which was a further improvement over the prior quarter’s strong rate of growth of 12.4%. This was the fastest pace of growth for the Private Investment component since Q3 2020’s growth rate of 82.1% when the economy exited the Pandemic Recession. The primary source of growth within Private Investment came from markedly positive effects related to increases in Business Inventory levels. Another potential indication that businesses are becoming less pressured by supply-chain woes. Elsewhere in Private Investment, a standout area of growth included Software Investment which grew at a pace of 12.7%. Investment in Single and Multi-Family housing experienced a second consecutive quarter of contraction, with each contracting by -10.4% and -2.6% respectively1,2
- Net Exports
- The Net Exports component of GDP did not have a material impact on economic growth in the quarter, however the U.S. Trade Deficit did grow to an all-time high level of $1.33T. This marks the 6th consecutive quarter that the U.S. Trade Deficit reached a new all-time high. U.S. Exports increased by 24.5% in the quarter but were largely offset by corresponding increases in Imports of 17.7%1,2
- The Government Spending component of GDP contracted in the quarter by -2.9%, a large decrease from the prior quarter’s growth rate of 0.9%. Federal Government spending experienced its 3rd consecutive quarter of contraction, having decreased by -4.0%. Contractions in Federal Government spending were largely driven by decreases in National Defense spending of -5.7%. State & Local Government spending also contracted by at a pace of -2.2% which marks a large turnaround from the prior quarter’s growth rate of 4.9%1,2
- The Unemployment Rate for the U.S. Economy is now at a level of 4.0%, which is not meaningfully far away from Pre-Pandemic levels of 3.5%1,3
- The Federal Reserve now considers the U.S. Economy to be operating at levels that are consistent with its overarching goal of Maximum Employment1,3
- There has been a sizeable amount of renormalization in the number of individuals in the Labor Force in the past quarter. The U.S. Labor Force is now at 163.7M, which is up considerably from the Pandemic low of 156.4M1,3
- Prior to the Pandemic, the Labor Force was comprised of 164.6M individuals. At present time, there is not a material difference in the Labor Force relative to Pre-Pandemic times1,3
- The number of Employed Individuals in the U.S. Economy is now at 157.2M, not meaningfully far away from Pre-Pandemic levels of 158.9M1,3
- The number of individuals who are formally considered Unemployed is now at a level of 6.5M, roughly an 800k difference from Pre-Pandemic levels of 5.7M1,3
- Weekly Initial Claims for Unemployment Insurance have continued improve and hover around all-time lows. The Current Initial Claims reading came in at a level of 238K1,3
- Initial Claims are now in-line with Pre-Pandemic levels1,3
- Continuing Claims for Unemployment Insurance have also continued to improve and are now at a level of 1.628M1,3
- Continuing Claims are now below Pre-Pandemic levels, and are also at the lowest level since 19701,3
- Both Headline & Core Inflation remain elevated far north of the Federal Reserve’s asymmetric 2.0% annualized target rate1,4
- Headline Inflation is now coming in at a rate of 5.5% (SAAR), which represents a deceleration in price increases relative to November’s level of 7.8%, as well as October’s level of 8.1%1,4
- Core Inflation remains abnormally elevated and has accelerated for each of the prior 3 months. Core Inflation is now running at 6.1%, an increase from November’s level of 5.9%, as well as October’s level of 5.4%1,4
- Over the past 3 months, deceleration in Headline Inflation has largely been attributable to significant stabilization in the prices of Goods rather than Services1,4
- Goods Inflation is now coming in at a pace of 6.7%, still elevated but down considerably from October’s level of 16.1%1,4
- Within Goods Inflation, deceleration appears to be stemming from both stabilization in both Durable & Non-Durable Goods. Durable Goods Inflation is now at 11.5%, down from 16.9% in October. Non-Durable Goods Inflation is now at 4.1%, down from 15.6% in October1,4
- Services Inflation is now running at a pace of 4.9%, slightly up from October’s reading of 4.1%1,4
- Within Services Inflation, some noteworthy items include Household Maintenance services (currently inflating at 16.9%), Public Transportation (currently inflating at 54.1%), and Rent for Tenant-Occupied Housing (currently inflating at 4.7%)1,4
- Market-Based measures of Future Expected Inflation are currently well below the actual current rates of Inflation, indicating market expectations for further price stabilization5,6
- Forward-looking expectations for future Inflation are now pricing-in 5yr annualized Inflation of about 2.8%. Pre-Pandemic expectations were usually between 1.5-2.0%5,6
- Expectations for annualized Inflation over the next 10 years are now pricing-in Inflation of about 2.4%5,6
- Both 5yr & 10yr Inflation Expectations are very elevated relative to historical norms, however, are still well below the current levels of actual inflation, a sign of expectations for further price stabilization5,6
FORWARD LOOKING ASSESSMENT
Under normal circumstances, letting a 500lb gorilla out of a cage would most likely be cause for concern… seems fairly logical, right? But what if I told you that the 500lb gorilla was not actually a gorilla, but in fact, the U.S. Economy? And what if I also told you that the cage was not actually a cage, but in fact, a confluence of supply-chain issues constraining economic growth? Well then… what initially started out as cause for concern would very quickly become cause for celebration. Welcome to the current state of the U.S. Economy.
To better understand the current state of the economy, let’s take a trip back in time to just one quarter ago and examine not only what we saw, but why we saw it. Q3 2021 was primarily characterized by positive, but decelerating, economic growth largely attributable to a lack of availability in all things effected by disrupted supply-chains, which mostly comprises of physical goods. This effect manifested itself in 3 ways. First, we saw aggregate economic growth slow markedly to a pace of 2.3% from the previous reading of 6.7%. Secondly, we saw Consumer Spending slow considerably to a level of 2.0% from a level of 12.0%. And lastly, we saw Business Inventory levels continue to erode away as companies continued to struggle with navigating the variety of issues persisting within their respective supply-chains. Individuals and Businesses simply could not get their hands on what they needed because it wasn’t there.
A natural question one might then ask would be “What would it look like if these problems were getting better?”. Well, look no further than present day. Current economic data juxtaposes very well with the economic data of the previous quarter in that it shows a well-defined reversal in all three of the aforementioned problems (Slowing Aggregate Growth, Slowing Consumer Spending, Eroding Inventories). Aggregate economic growth accelerated in the current quarter to a pace of 6.9%, up from last quarter’s rate of 2.3%. Consumer Spending accelerated to a pace of 3.3% from 2.0%. Businesses were also able to once again add to Inventories in a meaningful way by adding approximately $173B worth of provisions, which broke a 3-quarter streak of significant Inventory drawdowns. So, if last quarter’s economic woes were perpetrated by a general lack of availability in all things effected by supply-chains, this current quarter’s data may represent the initial burgeoning of a light at the end of the tunnel with regards to those issues. What used to not be available is now suddenly available.
Great! So, are we out of the woods yet? Not likely.
Important to note, the supply-chain disruptions being felt across the economy are an economic Symptom, not the actual underlying Cause itself. It is the general consensus that the underlying cause of this symptom is a large degree of dislocation between the Supply of, and Demand for, labor. At present time, there are roughly 1.5-2 million less people employed than in Pre-Pandemic times, even though there are close to an all-time high number of Job Openings available. Even weirder still, despite the fact that the Pre-Pandemic worker-gap is currently around 1.5-2 million individuals, the number of individuals who are formally considered Unemployed is only about 800k higher now relative to Pre-Pandemic levels, which by the way, were around 20yr lows at the time.
Strange? Yes. Troubling? Perhaps not.
There is a bright spot still in this very complicated mosaic that is the labor market, continued progress. So much progress that the Federal Reserve considers the economy to be currently operating at a level that is consistent with Maximum Employment levels. Additionally, it is unlikely that the economy will require the re-addition of the 1.5-2 million worker-gap to re-normalize, and therefore stabilize, supply-chains as many businesses continue to learn and adapt to the new post-Pandemic economic realities. Consider this, with the economy continuing to add jobs every quarter, and with the apparent economic reversal from last quarter’s supply-chain related growth woes, the light at the end of the tunnel may not actually be that far away, because we may have already reached it…
[See Below for Disclosures & Annotations]
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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- FactSet. “Economics – Country/Region – United States”. January 27, 2022.
- Bureau of Economic Analysis. “Gross Domestic Product, 1st Quarter and Year 2021 (Advance Estimate)”. January 27, 2022.
- Bureau of Economic Analysis. “Labor Force Statistics from the Current Population Survey”. February 4, 2022.
- Bureau of Economic Analysis. “Personal Income”. January 28, 2022.
- FRED. “5-Year Breakeven Inflation Rate”. February 1, 2022.
- FRED. “10-Year Breakeven Inflation Rate”. February 1, 2022.