US economic growth hit a soft patch in the third quarter due to supply chain constraints, labor shortages, and Delta Variance related slowdown effects. Growth rates will remain higher than normal but have peaked as fiscal and monetary stimulus is waning. Overall, pent-up consumer demand due to supply shortages, supportive fiscal and monetary policy, and favorable credit conditions provide a near-term backdrop for sustained cyclical improvement. There is no sight of a recession ahead.
All major economies are in expansion. Developed markets tend to have more favorable near-term backdrops, with reopening progress in Europe coinciding with improving consumer sentiment. China's deceleration continues, though growth may stabilize toward year-end as COVID-19 fades. The general trend of lasting re-opening as COVID threat wanes implies a continued broadening of the global economic expansion. The International Monetary Fund expects global gross domestic product to grow by 5.9% this year and 4.9% next year.
The US economy in mid cycle. The Delta variant has peaked but supply constraints and labor shortages remain a risk to U.S. economy. Progress on vaccinations should result in a pickup in economic activity as worker return to workforce. U.S GDP 2021 forecast is 6.3% growth according to CNBC survey – more than double than normal rate even despite COVID! 2022 GDP projected to exceed 3.5%.
While the rise of the delta variant has hurt consumer spending in third quarter, I see it as temporary. Demand should rise in fourth quarter. I expect rising employment and incomes in the fourth quarter. Consumer’s savings accounts a flush with cash – $2.0 trillion in excess savings. In the past, excess savings unleashes spending. Workers going back to work, higher wages, higher home prices, and record high balances in retirement accounts are supporting a wealth effect that is conducive for greater spending.
Covid case counts, hospitalizations, and deaths are continuing to roll over in the US which is a welcome development. In terms of vaccination rates, we are getting very close to three-quarters of the US population over the age of 12 receiving at least one shot while nearly two-thirds are fully vaccinated.
Companies shook off worries over the Covid delta variant and hired at a faster-than-expected pace in September. September employment data showed weak nonfarm payrolls growth in the Government sector. The private payrolls are increasing despite concerns about elevated Covid cases. The leisure and hospitality sector led job creation in September. Overall, the employment rate fell to 4.8% last month.
Supply constraints are driving up cost of goods for consumers. Wages continue to rise. I expect higher inflation next year as shortages to continue into next year, as demand remains strong. On an annual basis, average hourly wages gained 4.6%. Wage pressure is not going away. Job openings are at record levels and companies cannot fill positions without paying more and offering enhanced benefits. Now, with the national eviction moratorium finished, look for rents to rise. Rents make up more than 30% of the overall Consumer Price Index (CPI). Inflation impulse is not going away soon. CPI rose more than expected in September, up 5.4% Y-O-Y.
The global economy is flush with liquidity and stimulus. The excessive liquidity measures are distorting prices in markets and economy. In the fixed income markets over 70% of bonds issued pay a negative yield! Meanwhile world economy and U.S. economy in expansion mode with plenty of jobs available. There is no need for emergency stimulus measures. I see Global tapering gaining momentum in 2022 and yields rise! European Central Bank (ECB) is modestly tapering it bond buying program. Expect the US to start tapering this November. The Fed tapering will gradually lower purchases and still provide stimulus that is greater than QE2! The odds that the Fed will start normalizing policy rates in September 2022 are increasing according to CME futures.
Higher yields and rates from emergency levels should not pose a problem for economic growth. Rates must rise far higher than projected for consumer and credit demand to become really depressed. However, forecasted rate hikes will adversely impact highly levered areas of market and economy that are illiquid. Valuations will compress especially for high Price/Sales stocks. For the time being corporate distress ratios are historically low and households credit delinquency rates are very low.
The size of President Biden’s infrastructure bill and tax hikes are unclear. Congress is balking on the prosed figures. Comments by Senator Joe Manchin (D-WV) suggest that if something passes it will be substantially less than what the far Left wants. Mid-term elections are coming in 2022. Politicians on both sides of the aisle want to bring home some “pork” infrastructure spending. The question is how to pay for it. Bottom line, expect spending and corporate and individual tax hikes, but much less than what Progressives wish.