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Employers retreated in November, hiring just 210,000 new workers. That’s less than half what economists expected, with big disappointments in the retail and hospitality industries. We’re back to the doldrums, with fresh COVID concerns suppressing economic activity.
But wait! The labor market and other parts of the economy are so hot that Federal Reserve Chair Jerome Powell just signaled a big change in monetary policy. For the first time during the pandemic, Powell said on Dec. 1 that a bout of inflation could necessitate monetary tightening, including interest rate hikes sooner than expected. The Fed would normally do that only if it felt the economy were strong enough to handle it.
But wait! The bond market isn’t buying it. Rates on securities such as the 10-year Treasury bill would normally rise on the expectation of higher interest rates. Instead, they fell after Powell’s prognostication, a sign bond traders think weakness will undermine future growth.
But wait! The unemployment rate fell to 4.2%, the lowest level since before the pandemic. Labor force participation also improved, which means more people are finally rejoining the labor force after taking to the sidelines during the pandemic.
But … Well, you get the idea. Far more than usual, the latest economic developments are contradictory and dissonant. Some data suggest strength; other data, weakness. No single narrative makes sense. Politicians who want to ding the Biden economy have plenty of ammunition. So do Biden supporters eager to emphasize the extent of recovery. For normal people, uncertainty over higher prices, job opportunities and interest rates will probably linger at least until next spring.
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Most uncertain of all is the direction of the new Omicron variant of the COVID virus. Concerns about higher transmissibility and Omicron’s ability to thwart vaccines have clearly unnerved financial markets. Since the first reports of the virus surfaced in South Africa around November 26, the S&P 500 (^GSPC) has sold off by about 3.5%. There’s been a sharper selloff in oil markets, with West Texas crude oil futures down 12.8%. Those are clear signs traders expect a softer global economy for the next couple months, with the chance of a stall worse than the pullback during the Delta variant outbreak over the summer.
These developments, however, are strongly anti-inflationary. Rising energy costs have been one of the biggest drivers of overall inflation, now running 6.2% on an annual basis. If oil prices stay where they are or fall further, gasoline prices, currently averaging $3.40 per gallon, could fall to $3 or lower. Winter heating costs could drift lower, too. Inflation, suddenly, wouldn’t seem so pronounced.
Powell didn’t say the central bank will begin raising rates on some date certain in 2022. What he did say was the Fed now thinks elevated inflation could force the Fed to act sooner than it expected a few months ago. But maybe not. A sustained drop in energy prices would bring inflation down somewhat, and the Omicron variant could slow GDP growth. Less output means less spending and a bit less demand—also anti-inflationary. A few months from now, Powell might very well say, never mind, we’re not that worried about inflation after all.
Markets dislike this kind of uncertainty. So do consumers. The economy is steadily improving, yet confidence has been plunging since the summer, largely due to disruptions caused by the Delta variant, after many Americans thought COVID would be in the rear-view mirror. The Omicron variant and new restrictions on travel and commerce will probably push consumer confidence lower still heading into the holidays. More people may change or cancel holiday travel, as we slouch into another COVID winter of masks, distancing and worry.
President Biden would prefer a simpler, more upbeat story, as well. For now, he has to acknowledge concerns about inflation, Omicron, and labor-market stress, while also talking up improvements in the economy during his presidency. If he sounds too gloomy, he’ll contribute to voter malaise. If he sounds too Panglossian, he’ll lose credibility.
Nobody’s sure when the economy will start to feel normal again, or if COVID will ever end. What seems sure, however, is more surprises are probably coming.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.