Watch consumers, supply chains, and the pandemic, of course.
A year ago, we were forecasting a solid 2021, but forecast risks appeared to be mostly to the downside. In some cases, we correctly predicted a result but did not anticipate the cause. For example, recovery in employment was slowing, but the issue seemed to be one of weak demand, not tight supply.
Will consumers remain a bedrock for recovery?
The third round of stimulus enacted in March 2021 was not a total surprise, but it was far from certain as of late December 2020. Its fate rested on Democrats winning both seats in the Georgia Senate runoff election, and even that outcome did not necessarily ensure another stimulus package.
The March disbursements included large one-time payments to taxpayers, a continuation of generous unemployment payments through early September, and monthly advance payments of child tax credits paid in July through December. Our concerns a year ago over the strength of the consumer sector were moot following such extraordinary levels of stimulus.
Today, however, the situation is complicated. Consumers still have hundreds of billions of unspent dollars from the first three rounds of stimulus. They also might have strong pent-up demand in at least one major category of durable goods as a shortage of semiconductors has held back the availability of cars, trucks, and SUVs. Our qualification of that pent-up demand is due to the extraordinary levels of purchasing of used vehicles in lieu of new ones.
Another plus is the recovery in employment. We have seen some soft patches such as the preliminary figures for November and December, but continued gains in payroll employment are likely, and that will mean higher incomes and more spending. Also, in recent months, gains in total employment have outpaced payroll jobs.
These factors are not really upside risks to our forecast but rather just offsets to substantial downside risks. The largest probably would be sharply lower consumer spending due to a loss of stimulus. The omicron variant (or some future variant) is unlikely to generate another massive infusion of consumer stimulus.
With child tax credit payments gone, the economy just lost a monthly infusion of about $18 billion. The Build Back Better Act would renew payments through 2022, but that legislation is very much in doubt as Sen. Joe Manchin (D-West Virginia) said he would not support it without a major rewrite. Even if that legislation is dead, Congress might still pass a pared-down bill that includes the monthly payments, but that is far from a sure thing. Moreover, renewal of those payments would not boost spending; it would just support current levels.
Another downside risk is the converse of pent-up demand. Although the semiconductor shortage thwarted the purchase of as many new vehicles as consumers wanted, supply chain issues were not as severe in most other categories of durable goods, such as appliances, electronics, and furniture.
Stimulus-fueled spending arguably pulled forward purchases of durable goods that might otherwise have occurred during 2022 or beyond. Spending on durable goods remains very strong, but it has been outpaced by spending on non-durable goods in recent months. Also, given severely depleted vehicle inventories in 2021, much of 2022’s durable goods spending likely will be for cars, trucks, and SUVs.
Another downside risk for consumer spending is inflation. The 12-month increase in the Consumer Price Index in November was 6.8%, which is the largest gain in nearly 40 years.
Inflation brings a host of unpleasant effects, including higher interest rates, but the most direct one for freight transportation is that it reduces consumers’ buying power. For example, retail and foodservice sales in November ticked up 0.3% to a record. However, adjusted for inflation, November sales actually declined 0.5%.
Inflation is a relatively minor risk for freight, however. Also, it seems to be driven today largely by extraordinary consumer demand. If that demand wanes, we would expect inflation to settle as well.
Are supply chain issues an upside risk?
One of the big drivers of inflation in 2021 was vehicle prices, and those prices soared in large part because demand outstripped supply. In December 2020 we did not know about the impending semiconductor shortage, so that issue was nowhere to be found in our forecast risks for 2021. Motor vehicle and parts output in November 2020 had risen 2.8% month-over-month and were just barely below pre-pandemic levels.
Moreover, since we had no clarity over the stimulus and did not envision record levels of job openings, we did not anticipate the broader supply chain issues that have constrained other sectors. Nor could we have envisioned dozens of container ships moored in San Pedro Bay waiting to be off-loaded at the ports of Los Angeles and Long Beach.
As we enter 2022, supply chains remain stressed, but we anticipate improvement due to a combination of economic pressure to increase throughput and stabilization of demand. Opening bottlenecks obviously would be a positive development for the flow of goods, and at least modest improvement seems likely. Although there are no guarantees, the supply chain challenges we faced in 2021 appear to be largely an upside risk for 2022.
Automotive is one industry where the supply chain situation clearly is an upside risk. Given that the semiconductor shortage has proven to be so intractable, our base forecast does not presume a material improvement in 2022.
Meanwhile, the demand for increased production to the extent the chip situation does improve is only growing. As of November, inventories of motor vehicles and parts were more than 34% below pre-pandemic levels as sales were running 20% ahead. Even if sales weaken substantially, the automotive industry will need to push production limits for months to restore a comfortable level of inventories.