Despite real inflation concerns, consumer demand is showing remarkable resiliency and strength this quarter. COVID cases may be spiking globally, but the U.S. is well out of the summer doldrums, and we are now on track to more than double GDP growth this quarter compared with the third quarter.
The president has finally signed the $1.2 trillion infrastructure package, which will bring more jobs and liquidity to multiple sectors, creating a tail wind for the markets.
As an equity investor, however, I am closely watching the push-pull dynamic between inflation and consumer demand. Wages are increasing, but current data show that inflation is rising faster, threatening to erode spending power. Consumer activity constitutes the vast majority of GDP, so, in the coming months, we need to be alert to signs of diminishing demand, which could negatively impact corporate earnings in 2022.
The Federal Reserve is set to start reducing bond purchases this week. Keep in mind, however, that this is just a taper; the Fed will still be injecting $105 billion per month into the system through mid-2022. Depending on how serious inflation gets, we could see the Fed scaling back its asset-purchase program or hiking rates sooner to ensure the economy does not overheat.
Strong Consumer Demand Bolsters the Economy
Several factors contributed to resurgent consumer demand in October and November. Delta variant cases began to subside; we still have approximately $2 trillion in pent-up demand with a higher-than-normal savings rate at 7.5%; and work is plentiful. The U.S. Bureau of Labor Statistics' latest Job Openings and Labor Turnover Survey showed 10.4 million job openings, versus 6.6 million 12 months earlier.
In October, retail sales rose an enormous 16.3% year on year and jumped 1.7% from the previous month and, importantly, 22% from 2019 levels.
October industrial production came in 5.1% above its year-earlier level — its highest reading since December 2019. Last week, the Philadelphia Federal Reserve released its Manufacturing Business Outlook Survey of up 5.1% y/y; its diffusion index for current activity surged in November, well surpassing expectations.
In the services sector, economic activity grew for the 17th month in a row, with the rate of expansion setting a record for the fourth time in 2021, according to the Institute for Supply Management (ISM). The ISM's non-manufacturing activity index soared to an all-time high of 66.7 in October versus a 61.9 reading in September.
We continue to hear from company executives that services are in demand — airlines, travel sites and resort companies report that consumers are booking with them solidly through next summer.
