CDI Economic Summary: US kicks off new phase of slower but solid growth in 2022

Joseph Chang

26-Jan-2022

NEW YORK (ICIS)–Kicking off the New Year, the US economy is entering a new phase of slower, yet still solid growth. The US Federal Reserve is tapping on the brakes to halt runaway inflation which has proven to be more intransigent than transitory. Meanwhile, supply chain snags continue to disrupt business and the rapid spread of Omicron is delaying a full reopening of the economy.

ICIS forecasts US GDP growth of 4.0% in 2022, down from an estimated 5.6% in 2021 but well above the long-term trendline of 2-3%.

Inflation finally appears to be causing US consumers to slow down, with December retail sales down 1.9% from the prior month but still up 16.9% from a year ago. Notable month-on-month declines were in ecommerce (-8.7%), furniture and home furnishings (-5.5%) and apparel (-3.1%).

Surging crude oil prices are fanning the flames of inflation as they march towards the $90/bbl mark, raising transportation costs and costs all along the supply chain for consumers. A spike beyond $100/bbl would raise alarm bells as ultra-high levels in the past have preceded recessions. While the US economy is less dependent on oil today than in past decades, it still bears watching.

The Consumer Price Index (CPI) rose yet again in December by 0.5%, up a whopping 7.0% year on year – the highest since 1982 – with shelter and used cars the largest contributors to the increase. Even the core CPI – excluding food and energy – was up 5.5% from a year ago, well above the Fed’s target of 2% inflation.

The Fed will end asset purchases by early March and start raising interest rates with consensus between 3-4 quarter-point hikes this year. This should cool the economy and the housing market in particular as borrowing costs are already on the upswing.

Housing starts ticked up 1.4% in December to a seasonally adjusted annual rate (SAAR) of 1.70m, which was 2.5% above year-ago levels. Permits surged 9.1% in December, boding well for a strong start to the year. ICIS projects US housing starts rising another 3.4% in 2022 to 1.65m, providing a tailwind for construction-related chemicals and polymers such as polyvinyl chloride (PVC) and polyurethanes.

Automotive continues to struggle amid the semiconductor shortage with light vehicle sales falling 3.6% to a SAAR of 12.4m in December – the second consecutive month of decline and down almost 24% from a year ago. However, ICIS expects 2022 light vehicle sales to rebound to 16.0m from 15.0m in 2021 as chip constraints ease later in the year – still below the pre-pandemic 2019 level of 17.0m.

Manufacturing activity is still robust but losing some momentum as the US ISM Manufacturing Purchasing Managers’ Index (PMI) fell to 58.7 in December – down 2.4 percentage points from the prior month and well off the peak of 64.7 in March. Yet it it marked the 19th consecutive month of expansion (above 50). Respondents cited strong orders, tight labour markets and some easing of cost pressures.

Meanwhile, the US ISM Services PMI eased by 7.1 percentage points to 62.0 after reaching a record high in November.

Financial markets are experiencing heightened volatility on expectations of a series of interest rate hikes by the Fed, surging crude oil prices and continuing supply chain disruptions from Omicron and potential future variants. Concerns of a Russian invasion of Ukraine is also weighing on markets.

However, the fundamentals of the US economy are still sound. In the chemicals sector, companies have exercised capital discipline through the pandemic and many have refinanced debt at lower interest rates, boosting their resiliency in weathering any downturn ahead.

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