Key Takeaways
- Consumer prices have surged to a 30-year high on an annual basis as inflation expectations climb higher, hurting consumer confidence. While sequential consumer price index (CPI) inflation has moderated, and supply-side bottlenecks are starting to show signs of easing, these factors complicate the Fed's efforts to convince markets that the latest price increases are largely transitory.
- We now expect the Fed to raise rates a little sooner than it currently indicates. We expect the federal funds rate to lift off in September 2022, a bit sooner than our previous prediction for a December 2022 hike.
- After declining in recent weeks, new COVID-19 cases are holding steady at around 72,000 per day, much higher than the average of 11,500 in mid-June. Households therefore remain cautious when going out for dinners and trips.
- Initial jobless claims dropped to 267,000 last week, the lowest level since the start of the pandemic. If the average weekly decline over the past three months continues, initial claims will return to their pre-pandemic level by the end of the year.
- Indeed weekly job postings continued to climb to a new high and are almost 50% above the pre-pandemic baseline level, as the gap between job openings and hires widen.
| Summary Of Indicators | |
|---|---|
| Indicator | How the data looks |
| Virus and mobility | |
| COVID-19 cases | Daily new cases leveled off at almost 72,000 per day for the past 10 days. Daily new deaths continued to trend downward with an average of more than 1,000 per day. U.S. lags most of the developed countries in rate of vaccination: currently 67% of the population has received at least one dose, 57% is fully vaccinated, and 8% has taken booster shots. |
| Google mobility | Mobility in the U.S. remained largely stable since May as states remained fully open. |
| People-facing COVID-19-sensitive | |
| Open Table | As of Nov. 8, overall seated dinner bookings at restaurants remained below the comparable period in 2019 by 13%. Out of 50 states, restaurants in 20 states are still operating with various restrictions in place, while 30 have no capacity limits. |
| Air traffic | Although all states remain open to visitors without any restrictions, except for Kansas and Hawaii, domestic air travel in the U.S. remains almost 21% below its comparable day in 2019. |
| Current and future activity | |
| Home mortgage applications | The purchase index for the week ending Nov. 5 gained by almost 3% from the week earlier, aided by low mortgage rates. |
| Taiwan manufacturing PMI backlog of orders | The PMI backlog of orders declined by 22 points from its peak in April 2021 reflecting ease in ongoing supply chain bottlenecks. |
| Johnson Redbook Index | For the week ending on Nov. 5, the same-store sales index increased by 16% on a year-on-year basis (four week moving average) and continued to remain above the pre-COVID-19 level as consumer demand remained strong. |
| Consumer confidence | The surge in inflation expectations has weighed on consumer moods. U.S. consumer sentiment plunged 4.9 points to 66.8 in the preliminary reading for November, its lowest in 10 years. The Ipsos-Forbes consumer confidence index edged up slightly to 55.4, an increase of two points from two weeks ago. |
| Prices | |
| Lumber futures | Lumber futures declined by 24% from their mid-October peak, but remain above the pre-pandemic level amid a pick-up in homebuilding and tight supply of inventory. |
| Industrial metal price index | Industrial metal price index remained elevated, however it moderated slightly in November from its multi-year high as China cuts down on its metal imports. |
| Baltic dry exchange | Baltic exchange dry index fell by 50% from its record high in early October as supply disruptions eased. Besides a slowdown in economic activity, China is perhaps pulling global shipping costs down. |
| Forward inflation expectations | As U.S. inflation further accelerated to a 30-year high in October 2021 (6.2%), the inflation expectations measured by the 10-year breakeven inflation rate rose to another multi-year high. Meanwhile, the five-year forward rates also remained at its near-term high. |
| Labor market | |
| Initial jobless claims/continuing claims | As the labor market improves, initial jobless claims decreased further to 267,000 in the week ending on Nov. 6, from 271,000 in the previous period. It is the lowest number of jobless claims since the pandemic hit the U.S. economy in March 2020. |
| Indeed job posting | Indeed job postings at October end were 49.8% above the pre-pandemic baseline and remain at an all-time high. |
The recent surge in the growth rate of consumer prices to a 30-year high sparked calls from the market for the Federal Reserve to move much faster on raising rates, with markets pricing in the first rate hike at its June 2022 meeting, with more priced in later in the year. Indeed, the surge in inflation likely explains the recent drop in consumer confidence readings. The University of Michigan Consumer Sentiment Index hit a 10-year low in November as consumer price index inflation--both total and core, excluding food and fuel--climbed to its highest levels on an annual basis since the early 1990s. Our weekly confidence reading also hung around its August low, mainly because of frustrations about higher prices at the checkout stand.
This will complicate the Fed's efforts to convince markets that the current surge in prices largely reflects transitory factors. Fortunately, our real-time trackers indicated that some supply-side bottlenecks are starting to show signs of easing, suggesting the U.S. economy may begin to see price peaks alleviate in 2022. We now expect the Fed to raise rates a little sooner than it has indicated, and we expect the federal funds rate to lift off in September 2022, a bit sooner than our previous prediction for a December 2022 hike.
New Cases Leveled Off While Mobility Stalled
In the past two weeks, people-facing businesses still suffered from headwinds caused by the delta variant. After declining in recent weeks, new cases are holding steady at around 72,000 per day, much higher than the average of 11,500 in mid-June. Households therefore remain cautious when going out for dinners and trips, with Google community trends stagnating around 6% below pre-pandemic levels since early September. Seated dinners have edged down to 13% below the 2019 baseline level, from 7% below at the start of November. Air traffic has also stalled, at around 20% below 2019 levels.
Consumer Confidence Stayed Low As Inflation Expectations Rose
Amid a still-high number of new cases daily and high prices, real-time consumer confidence has weakened since our last real-time report. U.S. consumer sentiment plunged 4.9 points to 66.8 in the preliminary reading for November, its lowest in 10 years. Real-time consumer confidence has hovered around 56 since early August, after dropping from over 60 in the first half of the year, according to the Ipsos-Forbes Consumer Confidence Index. Inflation is another important factor discouraging consumer confidence, with elevated short term inflation expectations pushing long-term inflation expectations up to a 10-year high of 2.7%.
Chart 1
Chart 2
Inflationary Pressures Remain While Signs Of Alleviation Emerged From The Supply Side
Although bottlenecks remain across the supply chain and are keeping our real-time indicators at still-high levels, there are some signs of alleviation in construction and manufacturing. Lumber future prices stayed around $590 per 1,000 board feet in the past two weeks, 24% lower than its near-term peak in mid-October and well below its May high, indicating a mix of cooling home demand and replenishment of home inventories. The Baltic exchange dry index also declined by 50% from its record-high in October and is now at its lowest level since the start of the pandemic. This suggests that bottlenecks in the global transportation network are improving.
Chart 3
Chart 4
On the manufacturing front, the Taiwan manufacturing purchasing manager's index of backlog of orders also fell to 50.3 as of October from a peak of 71.5 in April, signaling that semiconductor production capacity is improving relative to strong global demand. The industrial metal price index also hovered around 1535 in early November, which is still high though 10% lower than the near-term peak in mid-October.
Chart 5
That said, all of these production indicators are above pre-pandemic levels and still signal sustained inflationary pressures. Producers are trying to keep up with strong demand for goods, indicated by Johnson Redbook's retail sales year-over-year growth rate being above 15% in the past two weeks.
Initial Jobless Claims Reached A New Low Since The Pandemic
The job market continues its slow recovery, with Indeed job postings 49.8% above the 2019 baseline level. Initial jobless claims dropped to 267,000 last week, the lowest level since the start of the pandemic. If the average weekly decline over the past three months continues, initial claims will return to their pre-pandemic level in six weeks.
Indeed job postings hit a new high at the end of October. This was supported by the Bureau of Labor Statistics' Job Opening and Turnover survey, which at 10.4 million openings was little changed from its record high in September. The BLS' quits level and rate also increased to a series high of 4.4 million and 3% in October, confirming what everyone already knew: it's a worker's market. Whether potential workers decide to take or keep a job is still an open question. Downside risks remain as many are reluctant or unable to return to their old jobs.
This report does not constitute a rating action.
| U.S. Chief Economist: | Beth Ann Bovino, New York + 1 (212) 438 1652; bethann.bovino@spglobal.com |
| U.S. Senior Economist: | Satyam Panday, New York + 1 (212) 438 6009; satyam.panday@spglobal.com |
| Contributor: | Shuyang Wu, S&P Global Ratings, Beijing |
| Research Contributors: | Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
| Shruti Galwankar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai | |
| Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
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