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December 3, 2021
Fourth quarter economic data in the U.S. shows an economy that appears to have more than fully recovered from the disappointing summer lull caused by a combination of supply induced inflation and the spread of the delta variant of Covid-19. High savings rates and accelerating growth in jobs and wages are driving consumer spending on both goods and services. Businesses continue to ramp up production in attempt to better match inventories to this strong demand. Some highly publicized supply chain issues are beginning to dissipate as port congestion declines and product availability improves in areas such as semiconductor chips for autos.
However, as we enter December the recently discovered Omicron variant of Covid-19 is generating concern about another virus wave causing renewed lockdowns, travel restrictions, and consumer hesitancy to spend on services. It is too early to adequately assess the virulence of this new strain or its potential resistance to vaccines. Several European and Asian countries, however, are beginning to impose restrictions, particularly on the unvaccinated. Wider adoption of such restrictions could restrain global growth at the end of the quarter moving into next year.
Inflation appears to be in the process of peaking on the loosening of some supply logjams although the rate of price increases will remain stubbornly high for a few more months. This will be particularly true in the services sectors where labor slack is fading, and wages need to rise to attract employees. Any hesitancy of production workers going into the factories due to the new variant could blunt the burgeoning supply chain improvements.
Chinese authorities tend to be more draconian in their reaction to Covid waves by implementing zero tolerance policies. But they are also more geographically focused on imposing lockdowns and extreme mobility restrictions only in those regions showing positive test results. Overall demand appears to be slowing in China as we approach the winter months.
The emergence of the new Omicron variant is a stark reminder that we are investing in an environment where the world must learn to adapt to and better live with the long-term reality of Covid-19. Vaccines and the possibility that each subsequent strain is less virulent than its predecessor may mute the inherent market volatility and allow investors to refocus on continued economic growth and growing evidence that supply of both goods and labor is beginning to catch up to demand.
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Ben is the Chief Investment Officer and a Partner in the New York office. He leads the firm’s Investment Committee and is a member of...
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