Economic Commentary

The Delta variant of COVID-19 has now been joined by Omicron, the latest variant that was first observed in South Africa in recent weeks. As with previous variants of the original virus, Omicron is thought to more easily spread particularly among the unvaccinated populations. As of this writing, the current initial as well as booster vaccines are thought to be effective against the disease, but confirming data of that assumption has not yet been released. The rippling effect of international flare ups of new variants and hot spots of infection continue to impact financial markets and rightfully so. At the outset of the pandemic, economic forecasters took the position that the pandemic would have a global impact and drastically effect global commerce. In the absence of fact and reliable data, voids are created. Eventually, the panic created by the absence of reliable data is replaced by the actual commercial and economic activity of demand, production and labor utilization. Each variant that arrives is treated similarly; and until the answers to questions of infection virulence and vaccination efficacy are answered, financial markets will assume the worst case scenario. Our recent global sell-off due to the announcement of the Omicron variant is a repeat of what occurred with the Delta variant. As facts fill the void of uninformed assumptions and fears, stability in markets will return. The volatility experienced is simply a reminder that our return to normalcy requires the ability to transact normal commerce and, therefore, the normal economic activity of consumption, production and labor. The evidence is clear that protection from current and future variants of the infection is necessary for normalcy to return. The evidence is also clear that people who are unvaccinated get the disease more easily and when they do they experience more severe illness, greater chances of hospitalization, complications and fatality rates than those that are vaccinated. If being vaccinated accelerates a return to normalcy, how successful are we at that task in the US as well as globally?

Bloomberg’s report of December 1 on its COVID-19 Tracker provides a barometer that is worth noting. In what they call the biggest vaccination campaign in history, more than 8.04 billion doses have been administered across 184 countries and the current daily vaccination rate is approximately 36.2 million doses per day. In the US, 461 million doses have been given thus far, and the current daily vaccination rate is 1.12 million doses per day, that includes initial doses, second doses and booster shots for those eligible. If we assume that the daily data does not change in either direction and the bar for herd immunity is 75% of the population, we will reach global as well as national herd immunity in late February. Averages, of course, don’t reflect actual experiences in all countries — just as national averages don’t reflect actual experiences in all communities, cities, counties and states. What is clear is that when we reach the 75% threshold, nationally as well as globally, the pandemic will become, more than ever, the pandemic of the unvaccinated. I have the privilege and opportunity to serve as a board member of one of our community’s health care systems. The facts on the ground for our health care system are nearly identical for all health care systems in the US. Anyone can be infected by the COVID-19 virus. Those who have been vaccinated and become infected overwhelmingly have mild disease symptoms, infrequently require hospitalization, and rarely end up in ICU or die of COVID-19. Additionally, over 80% of those hospitalized specifically due to COVID-19 are unvaccinated, and almost 100% of those in ICU specifically due to COVID-19 are unvaccinated. These may be unpopular facts for some, but the overwhelming evidence is once again that the pandemic is clearly becoming the pandemic of the unvaccinated. When we reach the 75 – 80% vaccination rate globally and within the US, what will be the political advantage to opposing vaccinations and impairing the return to normalcy? Let’s check in on the economy.

The Weekly Economic Indicator, which measures real time data reflective of consumption, employment and production, was measured at 7.31%, reflecting real GDP growth of 4.08% — a continued deceleration from the April 10 peak of 11.68% and 12.39% respectively, but to be expected. Recall that the value of using the Weekly Economic Indicator to access our economy during a recovery from recession is to evaluate how our economy is doing relative to the previous year (2020) when we were in the depths of the pandemic-created recession. As the recovery continues, it is logical that the year-over-year and month-over-month comparisons will normalize and shrink. What is clear by the data is that unemployment is shrinking, job growth is occurring, consumers are both spending and saving and the economy, as measured by GDP, is growing. In November, employment rose by 531,000 workers and the unemployment rate dropped to 4.6%. Average hourly earnings remained flat, as did average hours worked, and the labor participation rate grew marginally by 104,000 workers.

Inflation has received a great deal of print and air time lately as it is perceived as a political thorn in the side of whoever is in power. If inflation grows, the political opposition will want to make the case that consumers are being “taxed” by price increases and, therefore, going backwards economically. Inflation is typically reported using the PCE (Core Personal Consumption Expenditures) and comparing the change in prices over a twelve-month period or year-over-year time frame. Data points in economics have a great deal of noise in them, and filtering the noise can sometimes be summarized with the saying, “What would you like the number to be?” Often, the number or fact we want is not the important number or accurate fact. In general, comparing prices during a period of strong recovery and consumption demand to a period of severe recession and lack of consumption and demand makes little sense, and is of little value other than political leverage for those seeking it. In the spring of 2020, when the job loss skyrocketed and consumer demand cratered, in essence the economy nationally and globally paused in a hugely significant way. Inventory adjustments across all industries, with few exceptions, resulted in significant price decreases and, thus, comparing prices today with those of a year ago are by their nature going to reflect the reality of increasing consumer demand. Compounding the complexity of the comparison is the significant interruption in the supply chain of every component of production, from raw materials to finished goods, labor and transportation. It is good to remind ourselves that this pandemic is and was global, no country or industry sector has escaped the impacts of the economic contraction that occurred, and all countries and industry sectors are equally impacted by the challenges to supplying the demand for product and services as the strong recovery from the global recession continues.

The duration of time includes opportunities for wisdom, if we seek it, and also provides the opportunity to eliminate short-term economic noise. Over the last decade PCE as well as CPI, which includes fuel and food, have both averaged slightly below 2%. If we extend the trend to 15 years, inflation was well below 2%. The Federal Reserve has a dual mandate that focuses on employment and price stability. The basic assumption is that if the economy grows at rates above inflation in a sustainable manner, employment will grow and labor will experience real (adjusted for inflation) wage growth. The FED will utilize their lending powers to either stimulate or contract the economy to maintain the economic equilibrium that their mandate requires. Fed Chair Powell (recently re-appointed by President Biden) has cautioned about focusing on short term comparisons of both CPI and PCE data. He and his fellow Federal Reserve Board Governors understand that the significant decline in economic demand in 2020, and the significant increase in demand in 2021, are two offsetting parts of a recessionary and recovery cycle, and price stabilization should occur as normal consumption, production and employment cycles resume. The passing of time, and patience to impact product pricing, is necessary for the noise to subside in the data and, therefore, political noise to decline as well.