MainStreet Macro: Two Steps Forward, One Step Back

2022 is just getting started – and thanks to the Omicron variant, it’s already giving us flashbacks of the past.

The gloomy headlines might make you wonder where the economic recovery is headed. We’re in a cautiously optimistic mood this week, so let’s call it two steps forward, one step back.

One step forward: Main Street is holding its own

As we reported last week, small business hiring strengthened in December during the first half of the month, a short window in which the Delta variant was fading and Omicron’s rise had yet to accelerate.

We estimate that companies with fewer than 50 employees added 204,000 jobs in December. That’s much higher than the 61,000 new jobs we saw in the third quarter, and more than the 132,000 monthly average in 2021.

Small employers have it tough competing with larger companies for workers. Yet those small businesses still managed to create more than 2 million jobs in 2021, accounting for a third of all hiring. By ADP estimates, U.S. employment for the nation’s smallest firms has almost fully returned to pre-pandemic levels.

Another step forward: Manufacturing has momentum

COVID-related disruptions came at us from every angle last year. There were labor shortages, a scarcity of key components such as semiconductors, and shipping and transportation traffic jams. Raise your hand if you had a two-day priority package arrive eight days later.

One thing factories and retailers had no problem with last year was lack of demand. Consumer spending on goods, particularly big-ticket items, has held strong throughout the recovery, even in the face of higher prices and shortages.

That demand might be leveling off. In the first half of 2021, consumers increased spending on durable goods by 37% compared to a year earlier. In the second half of the year, growth in durable goods sales was less than half that, at 15%.

Slowing demand would give manufacturers a much-needed breather to replenish inventory. The Federal Reserve and other central banks, in turn, believe that might tame inflation.

One step back: Pandemic deja vu 

On Thursday, my two boys returned to remote learning for the first time this school year. In the before times, a day home from school was cause for a family celebration, even if it included homework. Now, it feels to all of us like a frustrating setback.

Just as Delta was petering out, Omicron has pushed covid cases to new highs. It’s too soon to measure Omicron’s economic effect, but we expect it to slow job creation and curtail spending at restaurants, nail salons, movie theaters and other service industries as workers and consumers play it safe and ride out this latest pandemic at home.

While the Omicron outbreak might be short-lived, the variant’s impact on public health and disruption to work and school routines still are likely to hit supply chains and the job market.

My Take

A covid surge is no way to welcome 2022, but Main Street’s capacity to weather this outbreak is stronger than it was a year ago.

Vaccines that slow the spread and severity of coronavirus infections are more widely available.

Company layoffs, as measured by initial jobless claims, are near historic lows. Demand for employees is near record highs. And workers continue to quit – and find new jobs – in record numbers. They’re all signs of progress towards a healthy labor market.

In short, even a new variant can’t undo the progress Main Street has made over the past two years. And we’ll continue to build on that progress in 2022.