Posted by lplresearch
As COVID-19 cases in the United States linked to the Omicron variant have fallen dramatically during the past month we look once more to high-frequency data for signals on how quickly the economy is reopening and what this could mean for the inflation outlook.
“With everything going on recently with market volatility, rate-hike expectations, and Ukraine, it has been easy to overlook the fact that getting Omicron in the rear view mirror is a huge step toward a fully functioning economy,” explained LPL Financial Quantitative Strategist George Smith. “The end of the Omicron surge should eventually reduce inflationary pressures by providing a much needed boost to labor supply shortages and reducing disruptions to domestic supply chains.”
As shown in the LPL Chart of the Day, just as in the experiences of South Africa and the United Kingdom (U.K.), where the Omicron variant was identified earlier, U.S. Omicron case counts fell from the Jan 13th peak just as rapidly as they had risen:
Two of our favorite high-frequency, daily data points to get a real-time view on the pace of reopening are the numbers of air travelers and restaurant bookings. As concerns over Omicron have subsided, both of these have seen recoveries, but only around halfway toward their pre-Omicron levels.
The data on U.S restaurant diners from OpenTable (via Bloomberg) shows that bookings had recovered to 2019 levels as the World Health Organization (WHO) designated Omicron as a variant of interest. Omicron concerns and closures led bookings falling 30% by the time Omicron cases peaked mid-January. After a strong initial recovery to 85% of 2019 levels, bookings have stalled since the end of January. So far in February there has been a further 2% decline as falling consumer confidence (the Bloomberg Weekly Consumer Comfort Index is now at its lowest level since June 2020) and inflation worries have potentially deterred people from eating out. Food away from home, as eating out is known in the Consumer Price Index (CPI) measure of inflation released by the U.S. Bureau of Labor Statistics, saw a 0.7% month-over-month increase in January as restaurants struggled with availability and cost of staff, as well as rising food input costs.
The latest data from the U.S. Transportation Security Administration (TSA) shows that the number of air traffic passengers travelling through U.S. airports has increased off the Omicron low at the end of January. Compared to the same period in pre-pandemic 2019 about 28% fewer people were travelling, about half a million less per day, as Omicron hit passenger confidence and left U.S. airports at their quietest since May 2021. Now that Omicron concerns are waning, passenger numbers are back up to 82% of pre-Covid-19 numbers but still lag 2019 by around 350,000 passengers per day (Bloomberg). Any continued recovery in passenger numbers will likely put upward pressure on ticket prices, another component of CPI. It is worth remembering however, that, per CPI data, airfares had been falling since 2013, had dropped a further 28% at the onset of the pandemic, and that even following recent increases, prices have only recovered to 1999 levels (www.BLS.gov).
With high-frequency data showing only a partial recovery up to this point, the Omicron variant will likely be a drag on the economy well into Q1 2022 (the Atlanta Fed is currently estimating only 0.7% real economic growth in the quarter (www.atlantafed.org)). Nevertheless, the swift nature of the surge should mean related labor shortages and supply chain disruptions improve as the year progresses. Omicron worries fading into the background should also shift some demand from goods to services, while also strengthening the supply side. Both of those potential developments could help control inflationary pressures; although, it is very unlikely any effects will be noticed before the Federal Open Market Committee (FOMC) starts its cycle of rate hikes, that we expect to occur in March.
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