Economic Sentiment Weakening but Headwinds May Have Peaked

Economic Blog Posted by lplresearch

Thursday, October 21, 2021

Main Street sentiment on the economic outlook remains elevated and optimistic as the economy rebounds, but has been weakening as supply chain bottlenecks, labor market shortages, inflation, and lingering Delta variant concerns limit the economy’s ability to meet still robust demand. There are some signs that some of these issues may be starting to resolve, but progress may be in fits in starts.

These views are based on LPL Research’s analysis of the Federal Reserve’s (Fed) Beige Book, a publication released two weeks before each Fed policy meeting that captures qualitative observations made by community bankers and business owners—what we like to think of as “Main Street” rather than “Wall Street.” As shown in the LPL Chart of the Day, our Beige Book Barometer (BBB) has declined over the last several Beige Books but still remains at a level that reflects the strength of the economic rebound. The BBB is based on how frequently key words and phrases appear in the text.

In the most recent Beige Book, “strong” words declined slightly and “weak” words ticked higher. By contrast, expressions of uncertainty rose more aggressively. Our sub-index of inflation-related words actually declined after easily reaching its highest level in the September Beige Book since we created the inflation sub-index in 2015.

“Economic growth has slowed as COVID-related structural challenges make it difficult for supply to keep up with demand,” said LPL Financial Chief Market Strategist Ryan Detrick. “With plenty of pent-up demand yet to be met, we think the economy can power through supply chain constraints over the rest of 2021 and into 2022.”

View enlarged chart.

Mentions of COVID-related words (virus, COVID, pandemic), which jumped in the September Beige Book, saw a modest decline in October, although it remains near double the July 2021 level, when optimism around reopening was at its peak. Mentions of shortages also fell slightly since September but remain high. Both are providing possible early signs that supply constraints have passed their peak but still have a long way to recover.

As we look ahead to 2022, we agree with the broad Beige Book assessment that there is reason for optimism about the economy’s growth outlook. At the same time, questions about how long supply chain constraints, labor shortages, and elevated inflation might last have created increased uncertainty as well as a challenging environment for businesses. We do still believe supply chain bottlenecks, labor shortages, and elevated inflation will improve substantially in 2022. If that happens, we could see an environment supportive of further gains for risky assets.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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