On the Path to Normal

Key takeaways

The Fed taper finally begins

The Federal Reserve announced that it will finally start to taper its asset purchases this month.

Good news on the US jobs front

US job growth in October handily beat expectations (although labor force participation remains a challenge).

A new front in the battle against COVID

More US children can now receive the vaccine, and new pills bring hope that COVID can be effectively treated.

Last week, several things happened that help confirm my view that we’re definitely heading toward a more normal, pre-pandemic world.

The Fed taper finally begins

First of all, following its meeting last week, the Federal Reserve announced that it will finally start to taper its asset purchases this month. The Fed is starting with a relatively small taper – $15 billion on $120 billion of monthly purchases¹ – but the Fed is flexible and could ramp up this tapering. As Fed Chair Jay Powell explained, monetary policy will adapt according to how the economy evolves. I think it’s very likely that tapering accelerates, as I expect fourth quarter economic growth to be far stronger than that of the third quarter, before moderating in 2022 to a more normal growth rate. While Fed policy is still extremely accommodative and far from normal, it has begun the path to normalization.

Good news on the US jobs front

We also got the US employment situation report for October. Non-farm payrolls grew by 531,000, handily beating expectations.² A significant portion of the job growth came from the leisure and hospitality sector, which makes sense given that industry hemorrhaged during the pandemic. This is one more indication the US is moving toward normal — and it was further confirmed by the Institute for Supply Manufacturing’s Services PMI for October, which was a whopping 66.7 – far better than expected.³

In addition, non-farm payrolls for September and August were revised upward to healthier levels, with the average three-month gains well over 400,000 per month.² This is impressive given the COVID headwinds hurting the US economy in August and September. The unemployment rate dropped to 4.6% from 4.8% (for reference, the pre-pandemic low for unemployment was 3.5%).²

All summer I was eagerly anticipating the jobs reports for October because I felt that would be the most “normal” we have gotten since the pandemic began, with children back in school in person across the country and enhanced unemployment benefits ending for those states that hadn’t already terminated them. While I was happy to see the job growth, I was disappointed with labor force participation, which remains well below pre-pandemic levels, but I am hopeful that we will see it improve in coming months.

A new front in the battle against COVID

The US is making more advances in its battle with COVID-19. The US Centers for Disease Control and Prevention approved Pfizer-BioNTech’s COVID-19 vaccine for children ages 5 to 11. Many families with young children have been waiting for this moment, as they view it as the beginning of a return to normalcy. Anecdotally, I’ve heard from a number of friends whose children are in that age group who are eager to get their children vaccinated and immediately embrace a more pre-pandemic lifestyle – especially going on a family vacation, an important tradition that they have chosen to forego for nearly two years.

In addition, Pfizer made an exciting announcement last week that should be positive for the entire world, not just the US. It has developed a pill that has been shown in clinical trials to dramatically reduce hospitalizations and deaths in COVID-19 patients. Pfizer said the results showed such “overwhelming efficacy” that it plans to submit findings to US regulatory authorities in order to obtain emergency authorization as soon as possible. This follows Merck’s recent announcement that it too has developed a drug to combat COVID-19, although the reported efficacy level for Pfizer’s drug is much higher. From my perspective, this really is a “game changer” that can help the world on its path toward normal without government leaders agonizing over vaccination levels. After all, local governments often have to resort to lockdowns and stringency protocols when hospitals become overwhelmed with COVID patients. If these treatments can help prevent that, then this enables a full re-opening of economies.

The global view

Europe is also on the path to normal, but it is lagging the US. It has been hurt by supply shortages and a substantial rise in COVID-19 cases in the past six weeks, as evidenced by October PMIs. In Asia, countries have also been negatively impacted by supply chain shortages and COVID outbreaks. China has also faced headwinds because of power shortages. But some countries are seeing a nice uptick in economic activity; Japan’s COVID cases have fallen since September and its October PMIs reflect that improvement. The key takeaway is that medical advances will help the entire world, although it will take time to spread, hence a lagged march toward normal depending on where you are around the globe.

Conclusion

And so I am confident in declaring that the world is on the path to normal. But that doesn’t mean the ride is going to be short or smooth – or that we won’t take a few detours on our route. Supply chain issues and inflation will likely be very problematic in coming months, especially in the US, but I view that as an unavoidable bump in the road given what the world has been through in the past two years. When battling a fire, you still have to contend with damage from the smoke and water once the flames have been put out. All in all, I believe the global economy is better off than it was a year ago and it is headed in the right direction.

Footnotes

1 Source: The Federal Reserve, Nov. 3, 2021

2 Source: Bureau of Labor Statistics, Nov. 5, 2021

3 Source: Institute for Supply Management, Nov. 3, 2021

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Originally Posted on November 8, 2021

On the Path to Normal by Invesco US

Important information

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All investing involves risk, including the risk of loss.

Purchasing Managers Indexes (PMI) are based on monthly surveys of companies worldwide, and gauge business conditions within the manufacturing and services sectors.

Tapering is the gradual winding down of central bank activities that aimed to reverse poor economic conditions.

The opinions referenced above are those of the author as of  

The opinions referenced above are those of the author as of Nov. 8, 2021. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.