Economic Commentary

We are marching incrementally towards the benchmarks that are necessary to reach an immunity level that will restore a good deal of a “new normality” to our daily lives. I intentionally used the term “new normality” as the evidence seems clear that while we are all done with COVID-19, it is also clear that COVID-19 is not done with us. The Omicron variant has taught us the lesson that vaccines dramatically improve outcomes from COVID-19 infection, but they don’t always prevent us from contracting the virus. The new variant may also be teaching us that subsequent variants, when they occur, are likely to be as contagious but less virulent. As data becomes more longitudinal, the reality may well be that future COVID-19 infections for the vaccinated will mirror outcomes similar to mild influenza strains and include similar health outcomes.

Continued progress in total vaccination rates will also likely reduce the strain on health care systems, allowing much needed capacity relief and the return to elective procedure opportunities which both of my knees will appreciate. To date, 64.1% of the United States population is fully vaccinated and approximately 750,000 people are receiving either their first, second or booster shot per day. To increase our vaccination total to 75%, we will need to get 36 million more citizens, mostly under eighteen years of age, inoculated — which will likely be achieved by the end of March.

Our new normal, once these benchmarks are achieved, will be far fewer hospitalizations, health outcomes similar to typical influenza, fewer shutdowns of universities, colleges and school systems, the return to in-person classroom environments and more comfort with gathering indoors. The description I have offered will be similar in most other advanced and mature economies whose vaccination rates are similar to the United States. For developing economies, the journey will take a bit longer, though the global daily vaccination rate is now approximating 25 million doses per day. In March 2020, as our economy cratered in the face of what was certain to be a global pandemic, we offered that our economy could not be healed until we defeated the pandemic. Twenty-three months later, we have witnessed significant illness and death globally and severe interruptions to the global economy. We also saw the innovative creation of effective vaccines and a global distribution plan that, while imperfect, has turned the tide against COVID-19. Along the way, new and effective medical protocols for treatment of infectious disease have been created and new ways of sharing, teaching and working have transpired. The difference between how we act and feel when we get to the 75% inoculation rate won’t be significantly different than today. It will not be a V Day type of “in the street” celebration. The differences will be more subtle, and many of the cautions we have grown accustomed to will remain with us. I imagine that there will be many behavioral science studies initiated to understand the impact on the social fabric of societies as a result of this historic pandemic. What will be the ways in which work, family, gathering and social interaction change as a result of our experiences? What interesting questions will be asked and what useful learnings will result?

The New York Federal Reserve Weekly Economic Index continues to moderate, reflecting the real time economic activity relative to consumption, production and labor. The latest release on February 1 was stated at 5.53%, reflecting an economy that was growing at a real annualized GDP rate of the same level. We began following this real time index in March 2020, to have a more accurate understanding of the depth of the economic decline and also to have a real time understanding on the status of the recovery. It has been a useful tool that included severe valleys of decline and rapid rises in the summer of 2020, followed by a return to more normal expansion and contraction cycles as the pandemic continued. We would expect that the index will continue to contract to the high 4% range as 2022 progresses.

Last week, the Bureau of Labor Statistics released unemployment data for January which revealed an unemployment rate of 4.0% with 467,000 new jobs added. The labor force participation rate rose 0.3% to 62.2%, still down 1.2% from February 2020 levels.  There continues to be broad hiring needs across all industry sectors.

Consumer confidence declined in both the Conference Board survey as well as the University of Michigan Consumer Confidence Index. Notes from the survey indicate a decline in sentiment, business conditions and present situation. Digging deeper into the participants’ results revealed a contrast between their own circumstances and how they viewed others’ circumstances. In essence, they were optimistic about their own circumstances but more sanguine about the plight of others. The Omicron variant was surging during the survey period, and daily broadcasts of inflation also bled into the survey results.

Supply chains remain constricted, but with some evidence of raw material inventory expansion in the latest factory capacity and utilization data. The degree of supply chain interruption was very severe and, as we have written about previously, amplified by modern logistics theory of just-in-time delivery, which at its core premise reduces the need to inventory materials required for production. Software engineered over the past two decades has effectively linked the order of finished goods to the just-in-time delivery of all materials needed to produce the finished goods. The savings in materials inventory motivated mass adoption of the technology, which unfortunately was not appropriately risk-tested for massive interruptions of supply caused by a global pandemic. Chasing the most efficient and cheapest component prices has left many manufacturers hostage to single-threaded suppliers. Engineering multi-source logistics chains is not a short term process, and the demand to bring the supply chain closer to the producer of goods has never been greater. We are not likely to see auto dealers fill up their lots with unsold product soon, and most analysts that closely follow the auto industry see the constriction of supply lasting well into 2023.

Inflation, impacted by demand greater than supply will also likely be present through 2022, much to the chagrin of the Democratic Party as the midterm election cycle is rapidly approaching. Explaining away current inflation due to supply chain interruption is not an elevator speech and can easily be targeted by political opposition. Is it a top-three voter choice issue? No, but it adds to the mix when your opponent is asking the electorate “Are you better off than you were two years ago?” Is it accurate, reasoned or fair? No, but what about politics is accurate, reasoned or fair? People are weary of COVID-19, and blaming every problem that exists on COVID-19 only makes them more tired. Supply chain interruption won’t be solved by November, inflation caused by supply chain interruption won’t decline much by November, but midterm elections will occur in November.