KEY DATA: Home Sales: -4.5%; Prices (Over-Year): +13.4%/ CFNAI: +0.62 points/ GDP: 7% (from 6.9%)/ Claims: -17,000
IN A NUTSHELL: “The economy was doing just fine in January, but the Russian invasion of Ukraine could have a real impact on world growth.”
WHAT IT MEANS: Whatever data came out today have been overwhelmed by world events, but let’s start with them as they tell us where the economy was before the shooting started. New home sales fell in January, but that was not a surprise. Cold weather, a lack of inventory and a surprisingly strong December combined to reduce total sales. Demand eased in three of the four regions, with only the West posting a gain, which was modest. Looking at prices, they rebounded sharply from the December drop and are nearing the high set in October. Over the year, price gains are robust, but nowhere near the 20% or more increases seen in the second half of last year.
Chicago Fed’s National Activity Index, a composite of 85 indicators, jumped in January. Each of the four indicator groupings rose, pointing to a broad-based improvement in activity. Other measures, such as the three-month moving average, also indicated that we should see continued solid economic growth.
Fourth quarter 2021 economic growth was revised upward slightly. The GDP inflation rate was revised upward, though the overall personal consumption price measure was revised downward. Regardless, the inflation rates were the highest since the wage-price inflation of the late 1970s-early 1980s. There is growing fear they could be just as elevated this quarter, given the potential impacts of the Russian invasion of Ukraine. Growth this quarter is likely to be modest, as the massive inventory rebuild we saw in the fourth quarter will not be matched at all this quarter. Inventories could take four percentage points or even more out of growth.
Jobless claims fell again last week, and the level is getting close to what we should see for the remainder of the current expansion. The labor market is tight and getting tighter.
INITIAL THOUGHTS ON THE RUSSIAN INVASION’S ECONOMIC IMPLICATIONS: The Russian invasion of Ukraine changes an awful lot of things. By how much? Who knows? We don’ know what is Putin’s end-game? We don’t know yet what actions the U.S. and its allies will take. We don’t know what the oil producers, especially Saudi Arabia and Kuwait, will do if energy becomes a weapon for both sides. The U.S. is less exposed to Russia than Europe, but Putin appears willing to pull out the stops to match any sanctions imposed on Russia. Will Europe and the U.S. be willing to pay the price of strong actions? It’s unclear, but there are few politicians who are willing to be called the new Neville Chamberlain. There is also the issue of China. As of now, the Chinese have yet to take a stand against the invasion. They are not even calling it an invasion, which is hardly surprising. Anything that weakens U.S. primacy helps China, at least that appears to be their strategy. That approach is likely to impact U.S./China relations. This is a political year, and you can be sure that anything but China opposing the invasion is going to lead to Senators and Representatives campaigning against China. Those politicians are likely to be on both sides and numerous. Will that vilification matter? It has to, but it is hard to say how. There will also be longer-term economic impacts. Europe (Germany in particular) is already re-thinking its relationship with Russia, especially when it comes to energy. That presents an opportunity and challenge to the U.S. to supply Europe with energy products. It is also likely to accelerate the movement to renewable energy sources that delink energy-importer nations from those that export carbon-based products. The Russian military action reinforces the basic concept that supply chains need to be as diverse as possible. Competition is good, but too many firms forgot that it includes competition between nations in providing goods and services, not just companies. That was a lesson learned from the pandemic and the supply chain problems that emerged, and hopefully that lesson is being pounded into the minds of leaders of nations and companies once again.