It was bound to happen. The economy’s post-lockdown resurgence is losing momentum. It has been an impressive surge. For months, the growth in sales and employment have broken records, as has the pace of new business formation. This recovery will continue. That is as certain as things get in economics. But it will slow. That is the message of the most recent flow of data.
Some blame supply-chain problems. This is a favorite focus among the authorities in Washington. No doubt, shortages and delivery delays have put a crimp in sales and even hiring. But what is happening now is more fundamental. Any snapback from an artificially constrained situation, as the pandemic was, will lose momentum and slow once it recovers the ground lost to those constraints. That is where the U.S. economy seems to be as it moves into 2022.
Probably the most telling figures come from the Federal Reserve’s (Fed’s) industrial production report and the Commerce Department’s tracking of retail sales. In December, the Fed calculated that overall production of finished goods in the United States fell 0.7% from November’s level. Though an outright drop, this piece of information is less a sign of general decline than of a moderating average rate of gain. The same could be said of December’s 1.9% decline in retail sales. Sales were growing so fast earlier in the year that even with this drop retail sales over the twelve months of 2021 still recorded a gain of 17%. Nor is the problem rooted in supply chain interruptions, since autos, where supply problems are particularly acute, had a relatively slight December drop of 0.4%, while the biggest declines occurred where supply difficulties are less acute, in furniture, for instance, books, sporting goods, musical instruments, and in general on-line retailers.
Of course, month-to-month figures can give false signals. Seasonal adjustments used by government statisticians can distort at any time but with retail sales that is especially true around holidays. This kind of statistical distortion is, however, less a problem when it comes to the tracking of new business formation. And these statistics, too, point to a slowed recovery momentum.
In December, nation-wide applications to form a new business totaled some 418,000, a drop of 2.8% from November’s level. Applications to form businesses that plan to hire workers and pay wages fell an even steeper 5.6%. Some regions of the country faired better than others, but declines were universal – in the northeast, the Midwest, the south, and the west. Were it just a matter of December’s report, the softness could be dismissed as an anomaly, but December’s drop is part of a trend of several months. It confirms the picture of a once powerful economic snapback assuming a less robust character.
During the lockdowns and quarantines of spring 2020, applications to form new businesses fell to a low of some 250,000. It was an inauspicious time to consider any commercial venture. As those pandemic-linked strictures began to lift during the second half of 2020, new business applications soared to some 550,000. Clearly, the business failures during the lockdowns and quarantines – the empty storefronts and restaurant spaces lining the main streets of the nation’s towns and avenues of its once-great cities – signaled opportunities, both for those who had failed and for new ventures looking to replace them.
That initial surge tailed off quickly, but applications picked up again as vaccinations spread, and people felt more confident that the nation would not again suffer lockdowns and quarantines. By mid-year 2021, these applications reapproached 500,000. But consistent with the picture of slowing recovery momentum, new applications have edged down each month during the second half of the year. What is more telling perhaps is that this gradual slowing appears in every major industry group tracked by the Census Bureau, retail, transportation, finance, administration and support, as well as accommodations and food services.
It would go too far to describe this moderation as a signal of economic decline. Even after the declines of 2021’s second half and December’s drop, applications for new business formation remain historically high. After all, they were running at about 300,000 just before the pandemic began. There is still some catching up going on, here and elsewhere in the economy. But as with the pace of retail sales, industrial production, hiring, and other measures of economic activity, the once breakneck pace of growth is slowing.
The broad picture should then create confidence that the economic recovery will continue, albeit at a slowed pace, well into the second half of this year and very probably beyond. The powerful surge lies in the past, but there is still some catching up to do. After that, continued growth will depend on underlying fundamentals. Although the economy has always had a bias toward growth, and that will continue, prospects 6-12 months out come increasingly under the cloud of inflation and whatever policies are put in place to combat it. For the time being, the dominant factor is the continuing post-pandemic recovery at a less dramatic rate than in the recent past.