Pollack: ’Twas the inflation before Christmas

The Monday Morning Quarterback

A quick analysis of important economic data released over the last week

By Elliot D. Pollack | Rose Law Group Reporter

We would like to take this opportunity to wish all our readers a very happy and safe holidays. This will be the last Monday Morning Quarterback for the year. We will be back with you next year with prognostications of what lies ahead in the new year.

The Decision is in: The Fed Will Take on Inflation

At its December meeting, the Federal Reserve announced they will address booming inflation by accelerating the reduction in their monthly bond purchases and likely raise interest rates three times in 2022. The move now signals that the Fed is concerned about rising prices and the risk that they become entrenched in the economy. No longer is the current inflationary trend thought of as transitory. This shifts the focus of the bank’s policy which, up until now, has been on stimulating the economy and getting Americans back to work.

The Fed now indicates it will end its bond purchases by the middle March instead of June. That move clears the way for an interest rate increase in the first half of next year. A majority of the Federal Open Market Committee’s 18 members expect three quarter-percentage point hikes next year followed by three more in 2023 and possibly two in 2024. Expectations are that the inflation rate will decline to 2.6% by the end of next year.

There is quite a bit of risk with the Fed’s policy. There is a fine balance to attacking inflation while not derailing continued economic growth. The Fed also noted that surges in COVID-19 infections and the emergence of new variants continue to complicate the economic outlook. Fed Chairman Jerome Powell emphasized that while they are addressing inflation, there is still work to be done on the employment side, particularly in boosting labor force participation.

What does all this mean for the housing market? The National Association of Realtors believes mortgage rates will drift higher due to the Fed’s actions and will likely hit 3.7% by the year-end 2022. Home sales may decline slightly due to the higher mortgage rates but will not crash thanks to job gains and the work-from-home reshuffle in residential location choice. Softer housing demand combined with more supply is expected to calm home price growth.

U.S. Snapshot:

  • Advanced retail sales grew 0.3% in November but are still down from the 1.8% seen in October. Consumer demand continues to be strong, as last month’s level was 17.9% above last year’s. Consumers also continue to face inflation and supply shortages.
  • Permits and starts rose in November, according to the U.S. Census. Both single family and multi-family permits rose by double digits, 11.8% and 11.3% respectively. Total permits reached a seasonally adjusted annual rate of 1.712 million, up 3.6% from October and 0.9% from a year ago. Single family permits were up 2.7% for the month but down 4.5% from last year’s rate. The permitting activity is another sign that homebuilders remain optimistic despite price increases.
  • The National Association of Home Builders/Wells Fargo Housing Market Index surprisingly increased to 84 from 83 in December. This time of year tends to be slower, but homebuilders remain confident and resilient despite labor shortages, material delays and the increasing difficulty in predicting pricing.

Arizona Snapshot:

  • The highlight of November’s employment data was that Arizona has finally recovered all the jobs lost during the pandemic. During the recession and total of 331,500 jobs were lost and as of November 2021 a total of 336,400 jobs have been created. The majority of the job growth has been in Greater Phoenix, which accounted for 264,500 or 78.6% of jobs created in the State. A total of 33,100 jobs have been created in Greater Tucson during the same time period.
  • Six out of the eleven supersectors have fully recovered (see chart below). Of the recovered supersectors, Trade, Transportation, and Utilities had the best recovery by adding an additional 41,300 jobs above the 45,800 jobs it lost during the recession. The largest job creation occurred in the Leisure and Hospitality supersector with 127,100 jobs created but remains 19,500 jobs below the February 2020 level. Government was the only supersector to suffer additional losses from April-2020, the trough of the pandemic.
  • Retail sales continued to grow, albeit at a slower rate than in September. Total taxable sales in Arizona were up 3.0% from September and 22.5% from a year ago. Retail sales were up 0.5%, down from the 3.1% growth seen in September. Maricopa County saw the same trend, with total taxable sales being up 2.9% and retail sales being up 0.4%.
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