William D. Johnston

Chairman

Economic Commentary

The popular culture media would have us believe that we are losing the COVID-19 battle, have lost all momentum in vaccinations, and are falling on economic hard times. It seems that we should test these themes with an examination of facts and raw data. As the sage mechanic might say, “Let’s lift the hood and see what’s going on.”

We have maintained from the outset that a full and complete economic recovery would depend on beating the COVID-19 virus. That was and continues to be our premise, because the full exchange of commerce cannot occur with interruptions of labor, production and consumption, either prolonged or intermittent. All of the available science from immunologists who study and track global pandemics have suggested strongly that countries that achieve 80% levels of vaccinated populations will experience victory over the virus. As with all previous pandemics, each specific virus is new or novel, and thus requires thorough and accurate analysis of how the virus acts in actual populations, and how the virus reacts to different protocols and vaccination products. While the world longs for one set of common facts, the science of immunology requires continuous fact gathering over longer continuums of time to allow for public policy recommendations that will improve the condition we are in.

Currently, 59% of all Americans are fully vaccinated. If you judge that total by the 80% standard established as necessary to defeat the virus you might come away disappointed. If you peel away the layers of the onion a bit, as we like to say, you discover that for people forty years of age or older 79% are fully vaccinated, and when we consider the most vulnerable ages 65 and above, 87.6% are fully vaccinated. So what is keeping us from the 80% target rate? You probably have already guessed it, those 18 years of age or younger. If we maintain the current rate of growth of vaccinations per month (5%) we will achieve the 80% threshold by the end of February of 2022. Should the roll out and adoption of vaccines have been quicker? Sure, but given the intense politicization of the COVID-19 virus, and the resulting public policy debates that gave fuel to vaccination resistance, we have made significant progress. If we were to only focus on the public debates occurring on the nightly news, you might significantly underestimate the total number of Americans fully vaccinated as well as the daily increase in vaccinations (320,000). Were we capable of doing better? Certainly. As Winston Churchill was given credit for saying during World War II, “Americans will eventually do the right thing, but only after they have tried everything else.” December 14 of 2021 marks the one year anniversary of the first vaccination approval, and the actual roll-out in substantive quantities wasn’t until late January of 2021. We can wish for a quicker return to normal and a reduction of variants or spikes, but what will actually get us to normal will be the accumulation of the 320,000 first time vaccine doses being administered every day.

It is well above my pay grade to influence those reluctant to become vaccinated, let alone those who actively raise doubt about the science and value of the vaccine; thus, I prefer to focus on the rate of growth and aggregate progress that we as a country are making in the pandemic fight. As we have experienced many times in our economy, steady incremental growth results in progress that eventually becomes significant. We will continue to monitor the data and report on the vaccination progress, because our economic return to normal depends upon it.

Labor, production and consumption are foremost on our minds and in our weekly analysis. Assisting us in this focus has been the New York Federal Reserve’s Weekly Economic Index. This index is a real time analysis of all of the data that surrounds the larger components of labor (employment and wages), production (raw materials, factory utilization, utility consumption), and consumption (consumer sentiment, consumer savings and consumer spending). The current index as of October 29 registered 7.06%, reflecting a growing economy year over year, though decelerating from this year’s March economic low. The thirteen-week moving average is 7.94%, and the annual real GDP data suggests a current annualized growth rate of 4.87%.

October’s unemployment rate of 4.8% fell below 5% for the first time since the pandemic began in February of 2020. As we have stated previously, the unemployment rate at this point in our economic recovery will be incremental from month to month and also reflective of our labor participation rate, which is down .02% from the previous month (120,000). Personal income as well as wages grew incrementally. Consumer confidence dipped slightly while retail sales remained essentially flat. The Purchasing Managers Index (PMI) was flat at 60.8%, and significantly above the 50% threshold that implies positive GDP growth. Government consumption held steady while private consumption advanced by $280 billion. New home prices declined while existing home prices grew slightly for the period. Days on inventory for existing home sales declined, and residential housing starts remained flat while new residential permits weakened into the winter season.

The recovery from the April 2020 economic lows continues, albeit at a slower and more sustainable rate. We would expect the GDP growth rate to exceed 5% for the full 2021 year, and continue to moderate below 5% for 2022. As we have suggested previously, reductions in unemployment below the current level of 4.8% will be stubbornly difficult. We are in the first full academic year of in-classroom learning. Those that depend upon childcare to return to work are significantly challenged, as many daycare centers are dependent upon low-wage earners who themselves are dependent upon child care to re-enter the workforce. Irrespective of any provisions in pending legislation for universal pre-K education, the current condition for low wage earners requiring childcare to return to the workforce will not change soon.

Historically, voters are significantly influenced by their personal economic condition, which includes employment income and spending power; thus, most presidents want low unemployment and low inflation. Conversely, the opposition party wants to question the strength of the economy and fuel the flames of inflation fears. During the beginnings of the global COVID-19 pandemic, all production of goods and services ceased globally. No country was spared the infection, which is why it was termed a pandemic. As a mature economy, we import more than we export. Our demand for imported goods, both raw (commodities) and finished (fully manufactured), exceeds our exportation of those goods. The vast economic resources of our country, and our ability to deficit spend, allowed our federal government to provide economic relief directly to the consumer during the deepest parts of the pandemic-induced recession. This economic relief allowed the consumer to continue to spend and save, which assisted in creating demand for goods and services. In many product areas the demand for goods, supported by the direct-to-consumer support, outstripped goods and services available for sale. Whether the demand was for housing, automobiles, gas, consumer durables, electronic goods, or clothing, the recovery cycle of demand was swift and felt globally. When too few goods are chased by too many dollars, pricing equilibrium is impacted and consumers began to experience increases at the gas pump and retail checkout stands.

Fed Chair Powell has acknowledged increased price inflation and has requested some patience with what he believes is temporary, not structural, price equilibrium issues that are forecasted to moderate in 2022 as supply chain interruptions are mitigated. As Americans, we don’t have to be hungry to eat or thirsty to drink, that is the nature of our robust and mature economy. The holiday season is upon us, and some shelves might well be bare, which I am certain will add fuel to the fire of the inflation flames. We are on the side of Fed Chair Powell, and see pressure moderating in 2022 but don’t expect doomsayers eager to take advantage of current inflation trends to stop their messaging.