Macro Outlook Feb 2022

Summary:

The Russian invasion of Ukraine has skewed markets towards volatility, inflation and uncertainty. An indeterminate resolution that drags over weeks or months will increase the likelihood of long standing impact to markets. Parsing out the unknowable resolution to the war in Ukraine, we see a US economy that is continuing to push towards normalization. However, increased delinquency rates on loans, continued housing market tightness and a sharp increase in PoC unemployment levels are troubling signs. While too early to call these trends, it is worth noting that structural tensions did exist in the economy even before the pandemic. Today’s labor market situation is clear evidence that there is a disconnect between the real economy and the financial one. The FED rate decision next month is seen as critical to the path of the economy in the coming year.

Individuals and Households

Retail loan levels continue to increase, though lagged data shows delinquency rates had started to pick up Q3 of last year. Not enough to call trend, but it will be something to keep an eye out on especially if we enter a rapidly rising rate environment. We are still below historical delinquency average level though. Similar story in mortgage data, continued increases in total loans with a Q3 uptick in delinquency.

Housing market remains very tight, as the housing supply growth has stalled, well below peak levels. Inventories thus continue to decline. Home sales back up in January, and private housing starts confirms supply is constrained still. Homeownership rate potentially leveling out after pandemic decline, though picture somewhat worrying for homeowners that have lost homes during the pandemic. In line with this, rental vacancies drop further, corroborating evidence of tenants facing dramatic rent increases in the coming spring/summer rental season. Construction spending continues to expand no reason not to. Home price inflation continues, confirmed by Case-Shiller and average sales price data. REIT valuations are decreasing though, perhaps tied more to equity/service industry valuations then property valuations.

Payrolls drop slightly in January ’22, though not by concerning level. Initial claims continue to remain relatively stable since October ’21. Small business owners continue to increase, getting closer to pre-pandemic levels, while contractors decrease from the summer ’21 peak. Unemployment rate does increase to 4.0%, but Weeks Unemployed approaches peaks of the pre-pandemic range. Quits still increasing in January though firings did as well. Hourly earnings still showing growth. 

Cash deposits at banks remain elevated though growth slows. Personal savings rate back to pre-pandemic levels. UMich Consumer Sentiment Survey continues to wane from summer ’21 optimism. Disposable income levels normalize. Rising price levels still haven’t dampened aggregate spending levels. Airline travel miles from November shows recovery as well. Diving into sector breakdowns though, we do see that spending seems to be slowing or even decreasing across broad retail sectors. New cars and e-commerce see a bit of a surge in latest data, but they are not back to recent peaks. Education prices continue to rise.

Businesses

Overall short term financing levels decrease, with financial companies driving the reduction. Nonfinancial firms continue to expand CP outstanding. Commercial real estate loans increase, though with an increased delinquency pattern similar to the retail sector.

Business expectations remain flat. Sales remain high but growth slows. Business spending expected to increase from a Capex perspective. However, employment growth expectations slow. Business conditions leveling out as overall openings, quits and vacancies have been holding steady in the last 6 or so months. Business applications, manufacturing orders steady as well. Durable goods orders still increasing. 

General inventories are starting to build back up. Automobile and manufacturer inventories still tight however. Shipment activity declines strongly but could be a seasonal effect. Total transportation index still high. Truck tonnage and vehicle miles remain in recent range.

Banks

Bank assets levels flat or declining across the board, with the only exception in real estate. Bank liabilities are declining as well, implying lower activity. 

Central Bank

CB asset growth slows as tapering kicks off, most evident in the 5-10 year duration. Long term inflation expectations moderate, velocity of money remains low, and reserves and monetary base decline.

Government

Federal spending declines but investments continue to ramp up. National output increases past pre-pandemic levels.

Inputs and Productivity

Global Price Index recent within reach of two decade highs. Commodity price inflation paused somewhat in Jan ’22, but recent oil data shows that price inflation has returned. Food prices remain high throughout.

General employment levels do increase but sector breakdowns show evidence of a decline or shrink in the number of employees. Contrast that by to a strong increase in labor force levels. Participation rates increase, showing strong growth as more woman return to work. Unemployment up, with Black and Hispanic unemployment levels seeing the greatest jump.

Industrial production reaches pre-pandemic levels, capacity utilization continues to recover as well. 

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