Economy Picking Up Steam
The employment picture showed continued improvement during November across a broad swath of metrics. We saw an all-time low in unemployment insurance claims. The household survey, a measure of people employed, increased by 1.14 million – the best reading since February 2020. The unemployment rate fell to 4.2% compared to a 3.5% pre-COVID level. The participation rate, a measure of the percentage of eligible workers employed, rose for the first time in 3 months to 61.8%. Every statistic we have observed points to a red-hot labor market.
Strong economic growth has returned following the Delta variant surge. Consumers have increased spending fueled by higher wages and excess savings. Businesses of all stripes are reporting robust demand. The ISM Services Survey hit an all-time high of 69.1% in November. The latest ISM Manufacturing Survey reported a 61.1% reading, an incredible feat considering continuing supply chain issues. We expect above-average growth to persist through 2022.
The cost of this good economic news is the side effect of higher inflation. The latest headline indicator soared to 6.2%, a level not seen since the first Gulf war. Businesses and consumers are dealing with price pressures at every level. The risk to markets is the Federal Reserve overreacting by raising rates too far or too soon. The fixed income markets seem most at risk in this scenario. We continue to hold short-duration bonds in balanced portfolios to protect client assets from higher rates. Our hope for the new year is for cooling inflation and a patient Fed.
Bottom Line: The economic picture has brightened significantly over the past few months. After more than a decade of sub-par growth, we may be on the verge of an economy that is growing too fast. We are encouraged that energy, commodity, and shipping costs have all decreased in the past month. This is a good sign that the economy may be heading toward homeostasis. We are hopeful Federal Reserve officials will be wise in their assessment and not make a policy mistake in the coming year.