Regional Market Summary Q4 2021

Up, then down

Quarterly Market Report Q4 2021

Dr. Kenneth Kriz Written by Dr. Kenneth A. Kriz, Distinguished Professor of Public Administration, University of Illinois

The economy in the fourth quarter of 2021 could be divided into two periods. During the first half of the quarter, the national economic recovery from the COVID-19 pandemic and associated mitigation measures continued. The pressures from higher inflation and supply chain stresses continued and even grew stronger. Still, the economy grew at a rate much higher than the long-term trend in economic growth as it “caught up” with growth lost during the middle of 2020. However, with the arrival of the Omicron variant in late November, some of the behaviors returned that we saw in previous virus surge periods. People reduced trips outside the home for shopping and leisure activities. Christmas parties were either cancelled or held in smaller groups. Economic growth waned as a result. The weak end to the fourth quarter set the economy up for much slower growth during the first quarter 2022.

Real economic growth at the national level (measured by Real Gross Domestic Product (GDP) was 6.89% in the fourth quarter, following the much weaker reading of 2.3% in the third quarter. The fourth quarter economy resumed the trend from the middle of 2020 in closing the “output gap” – the difference between Real GDP and where it was forecast to be prior to COVID (shown as the difference between the orange pre-COVID trendline in Figure 1 and the blue Actual line). By the end of the fourth quarter that gap had narrowed to just over $200 billion, after having been over $2 trillion in the second quarter 2020. The economy in the fourth quarter was strong, especially in the first part of the quarter. However, growth waned with the arrival of the Omicron variant, weakening the economy once again. Looking forward, an average of “nowcasts” from various forecasters that we track indicates that real GDP growth will be around 1.9% in Q4 (the red Projected line segment in Figure 1). This growth rate will not close the output gap.

The national economic recovery re-accelerated in Q4 2021

Source: U.S. Bureau of Economic Analysis (Actual), U.S. Federal Reserve Bank of Philadelphia (Survey of Professional Forecasters).

Payroll employment has almost fully recovered both nationally and in the region

The labor market has normalized to a great extent. By the end of the fourth quarter, the national economy had recovered nearly all the jobs lost in the spring and summer of 2020. National employment was only 2% below the pre-COVID level (Figure 2). Employment in the Quad Cities MSA is 3% lower than in early 2020.

Source: U.S. Bureau of Labor Statistics

Unemployment rates continued to fall during Q4 2021

Unemployment rates continued to improve in the fourth quarter (Figure 3), reaching a level of 3.9% nationally, with the Quad Cities area just a tenth of one percent higher (4.0%). The speed of the recovery from the depths of the recession has been the fastest of any recession since the “mini-recession” of 1954 after the Korean War. For some perspective on how quick the recovery in the labor market has been, it took 8 years from the peak unemployment during the 1990 recession for unemployment rates to fall below 4%. After the 2001 recession, it took 3 years and after the 2008-09 Great Recession it took 9 years. Unemployment rates peaked in April 2020 and fell below 4% in December 2021, a mere 20 months after the peak.

Source: U.S. Bureau of Labor Statistics. Note that the Quad Cities refers to the Davenport-Rock Island-Moline Metropolitan Statistical Area.

Quad Cities return-to-normal index fell during Q4 2021 after nearing its pre-pandemic level

Returning to the local economy, our “Return to Normal Index” shows that the Quad Cities economy had returned to pre-pandemic levels by the first part of the fourth quarter, as tracked by "high frequency" time series of economic activity (Figure 4). The index then fell gradually after the middle of October. The index then recovered slightly in mid-November before dropping more rapidly in December. This is consistent with a slowdown due to fears over the Omicron variant.

Source Data from Opportunity Insights and the U.S. Bureau of Labor Statistics. Calculations by author.

The global supply chain pressure index was at an all-time high at the end of Q4 2021

As we move into winter 2022, the uncertainty that we first discussed in the second quarter 2021 has grown even stronger. The consensus of economic forecasters in the Survey of Professional Forecasters is still that the economy will grow at rates faster than historical trends throughout 2022. However, the “point estimate” has fallen slightly (from 3.9% estimated in the fourth quarter 2021 report to 3.7% in the current quarter) and the variance of the estimates has grown. The consensus estimate for inflation in 2022 has risen substantially to 3.8% for Headline Consumer Price Index and 3.1% for the less volatile (and more commonly used by the Fed and other economists) Core Personal Consumption Expenditures Deflator. But once again, the variance of the forecasts is pronounced, with 1/8 of respondents to the survey projecting inflation in 2022 to run above 4% and a similar proportion projecting inflation at less than 2%.

As we have noted for over a year, there are many uncertainties regarding the path of the economic expansion. Concerns about disruptions caused by the continuing pandemic continue to weigh heavily on forecasts. Inflation remains a concern, as do supply chain issues. A newly released index of data from the New York Federal Reserve Bank addresses the latter. Their Global Supply Chain Pressure Index combines data from several different measures of supply chain performance to reflect the “tightness” in the supply chain. It is at record levels, having gone to record levels in early 2020, then subsiding in late 2020 before climbing throughout 2021 (Figure 5 – a value of zero indicates average tightness in the supply chain).

Source: Gianluca Benigno, Julian di Giovanni, Jan J. J. Groen, and Adam I. Noble, “A New Barometer of Global Supply Chain Pressures” Federal Reserve Bank of New York Liberty Street Economics, January 4, 2022, https://libertystreeteconomics.newyorkfed.org/2022/01/a-new-barometer-of-global-supply-chain-pressures/ .

As we have said consistently, the long-run path of economic growth and inflation continues to rely on coronavirus infection rates and whether supply chain and labor force pressures abate.