by Louis Navellier
December 7, 2021
Initial reports are that the Covid-19 Omicron variant from South Africa has up to 30 “spike proteins,” and it can therefore more easily infect people and be more vaccine-resistant, but so far existing vaccines have been effective at blocking the spike proteins that the Covid-19 virus utilizes to infect people.
That’s good news. The other good news is that Dr Angelique Coetzee, the first South African doctor to alert the authorities to this new variant, said that, “Symptoms were so different and so mild from those I had treated before.” Apparently, due to the malaria vaccine so prevalent in Africa, many people in Africa have been naturally resistant to Covid-19 and have not had the high death rates of other countries.
Nonetheless, travelers from Africa can be Covid-19 carriers, so Dr. Anthony Fauci said that the U.S. is rushing to get new scientific data on the new Covid-19 variant from South Africa. He also stressed that existing vaccines must be tested against the new Covid-19 variant.
Overall, markets are manic crowds and like to panic from time to time. The press also loves to print the worst possible scenario, to scare us – as do some government officials, in order to control us better.
Historically, viruses tend to mutate and become less deadly over time, just like the Spanish Flu did in 1918-1919. Although Dr. Anthony Fauci said that the U.S. should be prepared to do “anything and everything” to fight the Covid-19 Omicron variant, he also added that it is “too early to say” whether we need new lockdowns or mandates. I think it would be political suicide to impose new domestic lockdowns or major mandates going into a third year of Covid and a mid-term election, so I do not expect the media paranoia over the Covid-19 Omicron variant to impact consumer confidence and holiday spending.
In the meantime, the fear of the Covid-19 Omicron variant and reduced international travel have pushed crude oil prices down below $70 per barrel, allowing gasoline prices to drop a little, putting more money into consumers’ pockets. Natural gas prices are much more dependent on winter weather, since a cold winter can cause natural gas prices to surge, so overall energy inflation may persist for a while longer.
Consumers Could Push Fourth-Quarter GDP Back to High (First-Half 2021) Levels
Consumers are buying again, so I still expect this holiday shopping season to set all-time records.
For example, the Commerce Department reported that personal income rose 0.5% in October, while consumer spending rose 1.3%. That means consumers were dipping into savings or using credit. The personal savings rate declined to 7.3%, down from 8.2% in September. Anytime consumers are willing to incur debt to make purchases, that bodes well for both consumer confidence and holiday spending.
I should add that the Atlanta Fed last Wednesday revised its fourth-quarter GDP estimate up to a stunning 9.7% annual pace, up from its previous estimate of 8.6%. This is absolutely stunning. The upcoming November retail sales report may confirm indications of a very strong consumer spending holiday season.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The manufacturing sector also remains strong. For example, the Commerce Department announced that durable goods orders rose 0.5% in October, well above the economists’ consensus forecast for a 0.3% increase. Durable goods have risen for 15 of the past 18 months – during the pandemic!
Core capital goods rose 0.6% in October as businesses rebuilt inventories and consumer spending remained strong. Year to date, durable goods orders are up 22.1%, while shipments are up just 13.1%, so businesses continue to have robust order backlogs despite complications from shortages of components and parts.
Last Wednesday, the Institute of Supply Management (ISM) announced that its manufacturing index rose to 61.1 in November, up from 60.8 in October. The new orders component rose to 61.5 (up from 59.8 in October), while the production component surged to 62.2 (up from 59.3 in October). The backlog of orders component slipped to 61.9 in November (down from 63.6 in October), which is still very healthy, since any reading over 50 signals an expansion, and 13 of 15 surveyed industries expanded in November.
On Friday, the ISM announced that its non-manufacturing (service) index surged to an all-time high of 69.1 in November, up from 66.7 in October. Especially impressive were the business activity component surging to 74.6 (from 69.8 in October) and backlog of orders component at 65.9 (from 64.5 in October). All 18 service industries surveyed by ISM improved in November, so the service sector remains strong.
The Conference Board on Tuesday announced that its consumer confidence index declined to 109.5 in November, down from 111.6 in October. The present situation component declined to 142.5 (down from 145.5). This drop is very minor, and consumers were likely perturbed by the prices at the pump and other inflation that is finally starting to moderate as crude oil prices decline on the Covid-19 Omicron fears.
When both consumers and businesses are healthy, that’s usually a “one-two” punch that can propel the U.S. economy and the stock market dramatically higher. The Fed remains dovish and although the monthly quantitative easing has been cut back from $120 billion to $105 billion per month, the decrease in quantitative easing is (so far) slower than many economists anticipated. Furthermore, Fed Chairman Jerome Powell was reappointed for a second four-year term, so the Fed is expected to remain dovish.
As a result, the “Goldilocks” environment of low interest rates and persistent quantitative easing persists.
And finally, National Association of Realtors announced that existing home sales rose 7.5% in October (vs. September), although the volume of existing home sales has declined 1.4% in the last 12 months. One reason is rising mortgage rates. Mortgage rates have risen to an average of 3.22% at the end of October, according to Mortgage News Daily, up from slightly below 3% in mid-September. There are only 1.25 million homes for sale, which represents a 2.4-month inventory at the current sales pace. Median home prices are expected to continue to rise, due to tight inventories and continued low mortgage rates.
What’s Behind Friday’s Anemic Jobs Report?
Last Wednesday, ADP reported private payrolls rose by 534,000 in November, slightly better than the economists’ consensus estimate of 520,000, so everyone had high hopes for the Friday jobs report.
Then, on Thursday, the Labor Department announced that weekly unemployment claims in the latest week declined to 222,000, up from a revised 194,000 in the previous week. Continuing unemployment claims declined to 1.956 million, down from 2.049 million the previous week. Economists were expecting weekly and continuing unemployment claims at 240,000 and 2.003 million, respectively, so these results were better than expected. The previous week’s unemployment claims hit the lowest level in 52 years.
Then came the big shock Friday morning, when the Labor Department reported that only 210,000 payroll jobs were created in November, a massive disappointment, since economists expected 550,000 new jobs.
The good news was that the October and September payroll reports were revised up to 546,000 (from 531,000) and 379,000 (from 312,000), respectively, and due to a shrinking workforce, the unemployment rate actually declined to a post-COVID low of 4.2%, down from 4.6% in October.
Interestingly, the Labor Force Participation rate rose to 61.8% in November, up from 61.6% in October, but it is still below the 63.3% rate which prevailed prior to the pandemic. Average hourly earnings rose 0.3% (8 cents) to $31.03 per hour in November and have risen 4.8% in the past 12 months. Overall, November represented the slowest monthly payroll growth this year, but due to a shrinking workforce and lower unemployment rate, the Fed should stop trying to restore the approximately 2.4 million civilian jobs lost since the pandemic began, and move on to fight inflation. After all, they can’t force people to work.
Speaking of the Fed, Chairman Jerome Powell, fresh from being reappointed for a second term, told the Senate Banking Committee on Tuesday that “The risk of higher inflation has increased.” Hmmm! No more talk of “transitory” inflation now that he has job security? Furthermore, Powell said, “To get back to the kind of great labor market we had before the pandemic, we’re going to need … price stability.”
Translated from Fedspeak, Chairman Powell basically admitted that the Fed is finally getting ready to pivot from its unemployment mandate to address its inflation mandate.
Chairman Powell also hinted that the Fed may further reduce its quantitative easing by saying, “The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner.” So the Fed Chair is starting to lay the groundwork for fighting inflation in the New Year. Amazingly, the 10-year Treasury bond yield fell below 1.5% as the Fed Chairman spoke in front of the Senate Banking Committee.
The Fed’s Beige Book survey was also released on Wednesday in anticipation of its mid-December Federal Open Market Committee (FOMC) meeting. The Beige Book survey said that the U.S. economy was growing at a “modest to moderate” pace and that both supply chain issues as well as labor shortages are holding back overall economic growth, despite strong demand. The Fed survey quoted a logistics firm that said “Gas, electric, food, raw materials, products – everything is going (up).”
Clearly, at the next FOMC meeting (December 14-15), curtailing inflation will be the Fed’s top priority.