Supply chains: The Omicron variant is a ‘key uncertainty going into 2022,’ economist says
Oxford Economics Chief US Economist Greg Daco discusses how supply chain constraints are easing in some areas and the outlook for inflation in 2022.
Video Transcript
- Welcome back to Yahoo Finance, where supply chain conundrums continue to plague almost every sector as retailers make their last push for holiday shoppers. But could there be some good news on the constraints? Speaking with us now is Greg Daco, Oxford Economics, Chief US Economist. Greg, thank you so much for your time today. So you're tracking suggests supply chain issues have eased a bit in November, that's good news, but still remain the greatest supply side issue facing businesses.
GREGORY DACO: Yeah, I mean, in general, we've seen some easing. But I think it's undeniable that we still have a fairly high level of constraints on the supply side. We've seen some signs of easing in terms of transportation costs, in terms of transportation itself. We've seen some signs of easing in terms of inflationary pressures at the wholesale level, not at the consumer level yet. And we've seen some improvements in terms of supply site conditions on the labor market front with participation rising slightly and wage growth not accelerating in November.
So there is a slight easing. And all else equal, I would have said, we're probably past peak supply constraints. But we have the omicron vibrant, and that's a key uncertainty going into 2022.
- Greg, call me a cynic, but I'm wondering if it's ever going to filter down to the consumer level. Meaning, if prices are easing at the wholesale level but consumers have proven that they're willing to pay those higher prices, where the retailers sort of incentivized to lower those prices for consumers. Do you think it's going to happen? And if so, when?
GREGORY DACO: Now, I think that's a great question. I think we have to remember that next year 2022 is not going to be a carbon copy of 2021. We're going to be in a very different environment when it comes to consumer demand and demand in general. We won't be in an environment where demand is accelerating. We'll see cooler growth in terms of consumer spending growth in 2022. We're also going to see a lot less fiscal impulse. There won't be as many checks. If any, there won't be as much employment unemployment assistance.
And so we're going to be in an environment where the economy is still strong but cooling. And that's an environment where pricing power is not going to increase. So we have to be careful. And what we're hearing from a lot of clients of ours is whether they have the ability to pass on those costs for a prolonged period of time and not lose market share or lose demand further.
So that's really going to be the key question in terms of consumer prices. All else equal, I would expect some easing in consumer price inflation, not in the first half of next year, but really in the second half of next year, where we're going to see the combination of strong base effects and lower energy prices, all the way down quite sharply on inflation dynamics.
- And then going back to supply chain issues and constraint, how much more progress do you think can be made? I think it's 5% on the month, but how much more do you see in the short-term? Because warehouses are at capacity at the moment, aren't they?
GREGORY DACO: Yes, they are. But we're also in the midst of the holiday season. So we're also in the midst of a strong pull in particular for goods. As we see the demand mix rotate away from goods, you're going to see gradually more demand for services and less demand for goods. The stronger demand in services is, of course, going to be less goods intensive. So we think that will also help alleviate some of the supply pressures.
Essentially, you're working with two dynamics. On the one hand, you're going to see cooler demand for goods and cooler demand in general. And you're seeing supply gradually respond to that strong demand. So you're seeing a rebalancing act that's occurring right in front of our eyes. It won't happen overnight, but it's going to happen very gradually.
The key question is whether the new COVID variant is going to lead to renewed supply constraints and renewed inflationary pressures, or whether it will be less severe than feared in which case, we can see this ongoing rotation in the consumer spending mix and a rebalancing of the economy towards an environment that's less inflationary and less supply constrained.
- Greg, before we let you go, real quick, your outlook-- hard to answer this real quick, but your outlook for the labor market in 2022 and how many interest rate hikes do if any from the Fed.
GREGORY DACO: Well, I think for the labor market we're probably going to see job growth around 300,000, 350,000 jobs, 1,000 jobs per month over the course of 2022. We expect to get back to pre-COVID employment levels in the second half of next year.
As to the Fed, we know there's been a hawkish pivot we know. There's going to be a speeding up of QE asset tapering announced next week. Probably, with the QE asset purchases ending in March. The first rate hike will really depend on how strongly the Fed is concerned about inflation dynamics. I think that there's an increasing risk that in an environment of higher inflation in the first half of the year, the Fed will pull the trigger around mid-year. Our forecast is still September because we see those inflationary dynamics fall back over the course of the second half of next year.
- All right. We will leave it there. Greg Daco, Oxford Economics, Chief US economist, thank you so much for your insight and being with us today.
