State of the economy
The manufacturing and services sectors of the US economy grew for the 20th consecutive month in January, but not without the lack of headwinds, pulling down the rate of growth across the board. Manufacturers continued to experience a lack of labor (especially in the middle of the Omicron wave) and parts is causing backlogs to increase and prices to increase even faster.
Moral of the story: Supply chain issues continue to be topical for companies that actually produce good, and it doesn’t seem like this is going away anytime soon. There are indications that at least the labor side is starting to get better but we’re still sitting here with a big lack of inventories. For us, it means prices are going to keep going up for all the things we love to buy. Personally, it’s turning out to be an unfortunately expensive time to planning a wedding.
Pleasant surprise
The big economic report this week was the January jobs report. It was largely expected for the report to show a fairly tepid growth in jobs during the month given the wave of Omicron cases that tore through the country. In an extremely pleasant turn of events, we actually added 467k new jobs in the month, well ahead of expectations for 150k new jobs (some people were even expecting a negative number this month). Not only did we see a big number for this month, the reported numbers for November and December were increased by a total of 709k. Wages continue to increase, now up 5.7% over the last year. Importantly, the labor force participation rate (how many people above the age of 16 actually work or are actively looking for work) increased to 62.2%, bringing it within spitting distance to where we were pre-COVID.
Moral of the story: The economy is driven by people’s ability to spend, which is driven by the strength of the labor market. The labor market is really strong and continues to improve through new waves of COVID, which makes it seem like we might finally be out of the woods as it relates to this seemingly never-ending battle. With the labor market in good shape, the Fed is likely to completely shift its focus to fighting inflation, which means no more free money for the economy – taking this POV, stocks didn’t react positively to the good news from this jobs report.
Earnings so far
Earnings continued in full force again this week. Overall, revenues are at record highs, driving dividends and share buyback programs to record highs as well. And despite cost pressures, profit margins haven’t been completely destroyed – they’re only slightly lower than they have been in the past as companies are seeing higher revenues and managing costs through the use of technology.
Moral of the story: Despite the really strong end to 2021, stocks trade based on where future profits are going to be, and profits in 2022 just aren’t going to grow like they did in 2021. Last year was the first in a really strong recovery, resulting in profits growing by nearly 50%. In comparison, profits are only expected to increase by about 8% this year. Between slowing growth and rising rates from the Fed, stocks are likely to be on a roller coaster ride for a little more time as investors try to figure out the right valuation for these stocks.