US economy well positioned to weather storm Omicron


While the Omicron wave is likely to temporarily weaken U.S. growth, the first data released from 2022 suggests the economy is fundamentally very strong with robust growth and inflation keeping the Federal Reserve on course for rate hikes.

ISM Indicates Robust Manufacturing Sector

We had the first big data releases in the United States to start the year and while they are a bit weaker than expected at the headline level, the details show an economy in great shape as the booms approach. Christmas and New Year.

First, the ISM manufacturing index fell to 58.7 from 61.1 as consensus was for a slightly stronger figure of 60.0 with optimism largely centered on good regional indicators. However, the details are certainly stronger than the headline suggests as there have been only very modest declines in production and orders while employment actually fell to 54.2 from 53.3. and the backlog rose to 62.8 from 61.9 – remember anything over 50 is in expansion territory. There doesn’t seem to be much to fear from a demand perspective in the economy. Additionally, the chart below shows how the United States performs against China’s PMI index.

The US manufacturing sector surpasses that of China (ISM and PMI readings)

Source: Macrobond, ING

Lower for good reasons

Instead, the overall index was dragged down by a sharp drop in supplier lead times (64.9 vs. 72.2) – which in these current tense times is actually a good thing because this suggests that supply chain bottlenecks may be easing. A modest improvement in customer inventories (although still at very low levels which are deep in contraction territory at 31.7) confirms this. Definitely a better story than just looking at the title implies.

Prices paid have also fallen sharply (68.2 vs. 82.4) – a bright spot – but the issue of high demand versus lack of supply means manufacturers continue to have pricing power. A massive backlog of orders at a time when you know your customers are desperate – as contract customer inventories indicate – means the pricing pressures will remain high for some time.

Firms’ pricing power persists


Source: Macrobond, ING

Private sector quit rate hits new high

Meanwhile, data from the Job Openings and Workforce Turnover Survey shows the number of job openings in the United States fell to 10.53 million from 11, 1 million (consensus 11.1 million), but this still shows a large number of vacancies in the United States with weak job growth clearly due to a lack of available labor rather than to low demand for personnel.

Again, details show a stronger economic history with a record 4.5 million people leaving their jobs in November. This equates to 3% of all workers quitting to change employers, which brings us back to the top of the series for the 21-year survey. For workers in the private sector, it reached an all-time high of 3.4%.

Dropout rate in the United States – proportion of workers leaving their jobs to change employers (% of workers)


Source: Macrobond, ING

The Fed is watching and the rate hikes are coming

This survey has gained in importance since the December FOMC. Asked at the FOMC press conference in December about the best signals for maximum employment, President Powell replied, “The quit rate is really one of the best indicators … because people quit because they feel that they can get a better job and there are, you know, record amounts, historically, high levels of that suggest, again, that you have a very tight job market. “

The Omicron wave remains an obvious concern and should prompt some caution from consumers, while the increase in worker absences means more bottlenecks and tensions in the supply chain. Nonetheless, he is optimistic that the impact on health and economic disruption may be less intense and lasting than for the Delta Wave. Today’s data shows that the economy is well positioned to deal with them and will hold market expectations in place for at least three rate hikes for this year.

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