The U.S. economy picked up early in the fourth quarter as COVID-19 infection rates from the delta variant subsided and the vaccination rollout progressed, allowing more people to get out and spend, indicated by the Federal Reserve Bank of New York's Weekly Economic Index, which has picked up since mid-November (chart 1). The recent pickup in COVID-19 infection rates, particularly abroad and with the detection of several omicron cases in the U.S., increases worries that the U.S. may be heading into another wave this winter. This helps explain why infection rates have picked up since our Nov. 15 report, though it, together with mandates, also explains the increase in vaccination rates since our last report.

The U.S. economy remained resilient, despite a pickup in COVID-19 cases and higher inflation weighing on purchasing power. While consumer sentiment readings are dipping lower, spending has not slowed, as people have shown a willingness to forgive retailers for the higher prices as they prepare for long overdue visits with family this holiday season. A solid jobs market, with initial jobless claims at a 52-year low and job openings at record highs, as well as a household savings rate of 7.3%, are likely comforting workers experiencing sticker shock at the store, allowing them to keep their pocketbooks open (chart 2). Although wages, in nominal terms, are at their highest in 14 years, real hourly wage gains are negative, both on a month-over-month and year-over-year basis, indicating that while people are willing to pay higher premiums at the checkout stand before the holidays, their patience will likely run out next year.

Chart 1

Chart 2

Ongoing supply bottlenecks continue to pose a downside risk, though real-time data continues to suggest that there are signs off easing across the supply chain. Though well above pre-crisis levels, shipping and capacity measures have moderated some. The Taiwan Purchasing Managers' new orders and backlog orders have moved closer to the 50-point neutral rate. With Taiwan the leader in semiconductor production, hopefully this signals some moderation in bottlenecks later this year. Price pressures for several commodities we track as well as long-term inflation expectations have edged down from multi-year highs in early December. But with high inflation readings heading into the new year, we now expect the Federal Reserve to speed up tapering to reach 'zero' by March 2022, leaving the year open for at least one rate hike, perhaps even sooner than our forecast of one in September.

New COVID-19 Cases Picked Up Sharply Ahead Of The Winter Holiday Season

We have seen a resurgence in new COVID-19 cases in recent weeks, even before omicron gains traction, with new case numbers jumping 68% to 120,000 per day (seven-day moving average), compared to the low of 71,417 on Nov. 27. Cases are still 52% lower than the winter peak of 205,000 per day last January (chart 4). Hospitalization and intensive care unit admission also increased in the past week, but more slowly than new infections, which suggests the majority of new infections may not require hospitalization. That said, new deaths are running close to 1,600 per day on average, back to where they were in October. Not surprisingly, new infection rates are higher in states with lower vaccination rates.

Chart 3

Chart 4

Meanwhile, vaccinations continued pick up in recent weeks amid omicron variant concerns and more vaccine mandates. An average 1.2 million new vaccines are administered daily. As of Dec. 8, 2021, close to 60% of the population is fully vaccinated and 71% of the population has received at least one dosage of the vaccine. Meanwhile, the federal government expanded eligibility for booster dosages on Nov. 19 to all adults--now close to 15% of the population has received a booster dosage, and that number is increasing rapidly.

Some Moderation In Mobility Readings On Continued Virus Worries And Post-Thanksgiving Slowdown

Mobility, based on Google Community Trends data, saw a dip in early December, perhaps due to seasonal factors after Thanksgiving weekend and virus fears, though it remains close to its pre-crisis levels and well above rates seen in April 2020 and last winter (chart 5). Apple mobility trends have also trended lower recently. Public transport saw the largest declines since August while walking witnessed some moderation and driving saw little change.

Leisure activity also moderated post-Thanksgiving, partly tied to seasonal factors, though decisions to avoid crowded spaces on virus fears are also a possibility. Seated dinners declined 9.8% below pre-crisis levels as of Dec. 4, with slight declines recorded across all states we track (chart 6). Held back by restricted business travel, hotel occupancy rates slid for the third consecutive week, reaching 53% for the week ending Nov. 27, around 13 percentage points below pre-pandemic levels (chart 7). In addition to light business travel, household reluctance to spend on expensive airline tickets has helped keep air traffic 15.6% below 2019 levels since July (chart 8). So far, the impact of the current pickup in viral rates on consumer behavior seems to be much lower than previous waves, which suggests people have learned to live with the virus.

Chart 5

Chart 6

Chart 7

Chart 8

Consumer Confidence Dips Again On Higher Prices And Omicron Fears

The new fast-spreading COVID-19 omicron variant and higher prices at the checkout line have likely kept consumers' moods low during the holiday season. The Conference Board's Consumer Confidence index fell by 2.1 to 109.5 in November, a nine-month low, with the University of Michigan Consumer Sentiment Index dropping to a 10-year low of 67.4 for the month. The biweekly Ipsos-Forbes Consumer Confidence Index indicated further weakness early in December after a holiday boost in late November (chart 9). Rising inflation continues to be the main factor for falling confidence in this indicator.

Chart 9

Chart 10

Despite dour moods, the U.S. consumption story remains resilient, helped by a solid jobs market. August through October retail sales have proven that shoppers are willing to spend on items (if they can find them), despite a hefty price tag. The Johnson Redbook Same Store Retail Sales Index the week of Dec. 3, up 16.8% year-over-year, continues to indicate a shopper who is willing to spend for holiday cheer (chart 10). We may now see more willingness to buy electronics, apparel, toys, and other goods for use at home, instead of spending on vacations or eating out.

Mortgage Applications For Home Purchases Remain Elevated

Home demand likely picked up in November, as indicated by the increasing weekly Mortgage Applications Purchase Index from the Mortgage Bankers Assn. (chart 11). The average weekly growth rate in mortgage applications for home purchases was 3.5% in November, following an average rate of -0.6% in October and 2.1% in July. Higher home prices have slowed home sales into the fourth quarter, though sales are still high. New home sales ticked up 0.4% to 757,000 in October, a six-month high; existing home sales climbed by 0.8% to 6.34 million, a nine-month high.

Lower mortgage rates and tight supply in the resale market will continue to support home demand as higher prices provide an offset. Housing supply is likely to remain constrained on supply bottlenecks and worker shortages. Housing starts from July to October slowed to a still-high 1.52 million-1.57 million as commodity prices reached a 15-year high in March, capping demand for new homes.

Chart 11

Chart 12

The slowdown in new home sales since nearing 1 million in January explains why some of the pressure has eased on lumber prices, which are still 45% below their record $1,686/1,000 board ft in May (chart 12). Still, lumber prices doubled in the past two weeks to $936.7/1,000 board ft. The recent surge in lumber prices is likely due to flooding in British Columbia disrupting operations at one of the leading lumber manufacturers and the U.S. Commerce Department's announcement of plans to double tariffs on softwood lumber from Canada to 17.9% from 8.99% in 2022.

Supply Chain Woes Pick Up Again After Intermittent Ease

Prices across other commodities we track have either stabilized or softened in recent weeks, though they remain well above pre-crisis levels. The Industrial Metal Price Index (IMPI) remained 44% higher than its 2019 average of $1,085.47, though down to $1,562 per point from $1,610 per point during the last week of November (chart 13). The Baltic Exchange Dry Index, which had been on a downward trend, rose by nearly 32% in the past two weeks to $3,235 on Dec. 6--about 141% higher than its 2019 average (chart 14). The uptick in the Baltic Dry Index could be tied to resurging COVID-19 cases and, if the omicron variant sets off a further surge in cases, poses an upside risk of port closures and factory shutdowns, leading to supply shortages. Retail gasoline prices ticked down to $3.30 the week of Dec. 6, from $3.40 in November, but remain near the seven-year high (chart 15). Raw steel capacity utilization has also moderated closer to its 2019 average (chart 18). Overall, the input costs of producers are well above pre-pandemic levels, indicating underlying price pressure due to material shortages.

Chart 13

Chart 14

Chart 15

Chart 16

While global supply chain bottlenecks remain significant heading into December, there are signs of a slight easing in December. Domestic and foreign supplier delays capped at cycle highs the last week of November, but it remains to be seen whether it's a short intermission until the holiday surge or a true turning point (chart 16). While interstate miles traveled for trucks edged down in late November, the dip may have more to do with a holiday slowdown than a change in shipment trends. Miles traveled for trucks remained 12.3% above 2019 levels (chart 17).

Chart 17

Chart 18

Inflation Expectations Up Again Ahead Of FOMC Meeting Next Week

Consumer prices have surged to a 39-year high on an annual basis as inflation expectations climb higher, hurting consumer confidence and weighing on business costs. Even the Consumer Price Index three-month moving average looks set to surpass its second-quarter price gains. While supply-side bottlenecks are starting to show signs of easing, that's still from record highs. Long-term inflation expectations, as measured by the 10-year forward inflation rate, ticked down to 2.52% on Dec. 8 after reaching a 16-year high of 2.76% in November (chart 19). We believe supply constraints and still-high inflation expectations give the Fed reason to retire the word "transitory" in their next Federal Open Market Committee statement and speed the pace of tapering bond purchases to reach 'zero' in March--as we expected, but three months earlier than they previously indicated. This would give the Fed more room to start to raise rates sooner next year, perhaps even sooner than our current forecast of September 2022.

Chart 19