William D. Johnston

Chairman

Economic Commentary

Happy New Year to all! I hope that you were able to celebrate the new year with reflective gratitude and the grace of optimism as we look forward to the promise and challenges of 2022. This column is written and published each month just as it has been for the past thirty years. Wow, how time flies. Thanks to those who have endured my musings, opinions and occasional summaries of economic facts and data. During the past 360 articles that have included 720 pages and over 16,200 words, we have weaved our way through a litany of domestic and geopolitical events that were, at the time, declared to be crisis level in nature. Whenever we get too pessimistic about our future, it’s always helpful to take a look in the rear-view mirror to examine what we have survived and perhaps even flourished through. Though not meant to be totally inclusive of all that occurred, the following list is impressive in its enormity.

1987     Black Monday, global financial markets decline in one day 29% – 44%

1991     Global recession created by the savings and loan crisis

2000    Dot-com bubble recession begins

2001    9/11 attacks on U.S. soil and resulting invasion of Iraq and Afghanistan

2005    Katrina hurricane

2007    Mortgage-backed securities crisis that created a credit implosion forcing liquidation of banks and financial institutions

2008    The Great Recession

2011     Japanese tsunami and nuclear disaster

2015     Greek and Italian debt crisis

2015     China enters the World Trade Organization as the globe’s largest economy

2016    Donald Trump shocks the world by becoming the 45th President of the United States

2016    Brexit as the UK votes to recede from the European Union

2020    COVID-19 pandemic

2020    Recession begins March of 2020

2020    Joe Biden becomes the 46th President of the United States

2021     Approved COVID-19 vaccination becomes available for mass distribution January of 2021

2021     U.S. continues to struggle to achieve vaccination rates necessary to render COVID-19 virus moot

During this thirty-year span of time we have also endured many natural disasters, such as hurricanes, floods, fires and tornadoes. Through it all, the Dow Jones Industrial Average increased from 2633 in December 1990 to 36,705 on December 31, 2021, an increase of 33,705 points, with an annual average return, inclusive of dividends, of 10.78%. A dollar invested in the index in 1991 would be worth $26.44 today. For those with the capital to invest, and the intestinal fortitude to remain invested in the midst of all of the crisis events that occurred during the past thirty years, times have been very good. The tremendous growth of financial assets, though, has also contributed to the largest wealth gap in our country’s history.

To date, 204 million U.S. citizens, 62% of the population, have been fully vaccinated. Our daily vaccination rate continues at 1.35 million doses per day, suggesting that we will achieve the goal of 285 million people fully vaccinated by the end of February 2022. Two hundred and seventeen countries now have a vaccination program in existence, with 9.2 billion doses administered. Global benchmarks will be achieved in April 2022 if the current ten million doses per day continue. Accomplishment of global immunization benchmarks enhances a complete return to travel and commerce necessary for global GDP expansion and the repair of global logistic chains.

The Conference Board released their estimates for Q4 2021 GDP results at +6.5% with full year results of +5.6%. Their forecast for 2022 remains at +3.5%, which includes the assumption that the full Build Back Better legislation bill is passed. Their forecast model implies a +/- 0.4% change in either direction should the legislative action differ from their model assumptions. Unemployment, currently at 4.7%, is projected to decline to 3.8%, while inflation is estimated to decline from the current pace of 6.2% to 3.5%.

Currently, the Consumer Confidence Index strengthened to 115.8 from 111.9 while the Present Situation Index remained constant at 144.1 and the Short Term Index increased from 90.2 to 96.9. The New York Fed’s Weekly Economic Index of 12-25-2021 registered 7.91, which was a slight increase from the prior week’s result. The index, which accumulates current data surrounding consumption, labor and production, registered -11.32 in April 2020 and peaked at +11.87 exactly one year later in April 2021.

Media reports of inflation continue, but with a bit less vigor than last month. Fed Chair Powell thinks that the supply chain interruptions attributed to COVID-19 will continue well into 2022, and could be negatively influenced by new variants. His perspective makes sense, and monetary policy that is restrictive may be too soon to use though the meeting notes released from the last FOMC meeting suggested strongly that the Fed would begin to reduce asset purchase volume which essentially is the beginning of tighter monetary control. The basic philosophical question among Fed governors remains, “Is the surge in demand and lagging supply of available product structural or pandemic-specific?” Closer examination of their discussion is specific to the inflation inputs of labor, commodities, manufacturing, logistics, stimulus duration effects and health care interruption impacts. What is likely to be repaired in the cycle of demand and supply and when will that be evidenced in price stability? Further, they seek to know how monetary policy can best assist in the repair process. Recall that when the pandemic exploded in early 2020, demand for most finished goods evaporated, creating excess inventories and production halts in all segments of the logistical supply chain. All mature economies chose to apply immediate business stimulus and wage protection programs, thereby stabilizing and augmenting consumer confidence and demand. Depleted inventories came under intense demand which could not be met by the interrupted, and in many cases broken, supply chain from raw materials through finished goods. Demand that exceeds supply creates inflation, and that is the condition we are in.

Traditional tools of increasing or decreasing money supply can’t repair the supply chain, but raising interest rates and tightening the supply of credit can deter increased investment in supply chain repair. As Fed Chair Powell suggests, the pandemic is still with us, we don’t currently know the future impact of variants and now is a good time for a little patience. An examination of the previous thirty years of geopolitical, domestic, economic implosions and natural disasters with which we started this commentary, suggests that patience may be what cures the inflation concerns present today.