Now that full-year GDP numbers are out I can finish the 2021 year-in-review series (part one & two) by taking a look at major economic indicators.

The employment situation improved significantly in 2021 and labor market has become very tight (Exhibit 1). However, despite re-gaining 6.5 million jobs, we are still 3 million below the 2019 level. Some of it might be explained by people becoming self-employed and starting businesses or by leaving workforce all together. This theory makes sense looking at the unemployment rate which stood at 3.9% in December, down from 6.7% a year ago and only up slightly from historically low 2019 number. Likewise, U-6 rate declined to 7.3% – it’s a broader measure defined as “Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons”.

Exhibit 1 – Employment

U.S. real GDP rebounded strongly at +5.7% last year, which was the highest growth since 1984 (Exhibit 2).  On a less positive note, Inflation as measured by CPI hit 7% also highest since the 80’s (1981 in particular). Price increases of everything from beef to cars was one of the biggest stories of the year and I did a separate post on it last week here.  Wages did go up a solid 4.7% but not quite enough to keep up with inflation. U.S. Dollar rebounded by 5.2%.

Exhibit 2 – Growth & Inflation

Federal finances remain a mess (Exhibit 3). Another stimulus bill and an infrastructure bill later, public debt went up another 7% to $29.6 trillion (it just crossed a nice round $30 trillion this week). Although with the strong GDP growth, the debt as a percent of it actually declined to 123%. In the same spending vein, budget deficit for fiscal 2021 was $3.7 trillion, up 17% from already hefty 2020 pandemic era expenditures. It was 16% of GDP, which is not sustainable for much longer. On the monetary policy side of government support, Federal Reserve’s balance sheet expanded by another 23% to a bloated $8.3 trillion. That was the other big economic story of the year – Fed reducing its policy accommodation. They are buying fewer bonds each month and will eventually let the balance sheet actually decrease in size, but it’ll remain elevated for years to come. They are also expected to start raising interest rates with 4 or 5 increases this year. It will be a tricky balance and it’s already spooking the market however well-telegraphed it is.

Exhibit 3 – Debt & Deficit

So what about the stock market you might ask? S&P 500 earnings increase by an astounding 66.5%; it was, however, from the COVID-depressed 2020 level (Exhibit 4). More impressively, earnings are already 30% higher than pre-pandemic levels in 2019.  P/E multiple did decrease to a more reasonable if still elevated 23.4x.  So the net result of changes in earning and P/E ratio was solid 27% increase in the S&P 500 level (excl. dividends).

Interest rates recovered from all-time lows with 10-Year Treasury rate ending the year at 1.5% (it’s up to 1.8%+ so far in 2022). 30-Year Mortgage rates went up to 3.1% but it already spiked to 3.55% by end of January.

Exhibit 4 – Earnings & Rates

Finally, the housing sector had another monster year driven by very low inventory and high demand (Exhibit 5).  Existing home sales went up by 8% but new homes actually decreased 7%. Leading indicator of housing starts did go up by 14% so there should be more new supply coming online in 2022. The inventory of existing homes reached another all-time low of 1.8 months’ supply (normal is around 6 months’). Depending on the metric you choose, home prices went up by 9% to 17% leading many to wonder when affordability would finally start to matter. Our local Tucson market had a very strong year as well, you can check out this Long Realty report for more details.

U.S. auto sales increased 3.6% to 15.4 million a year, which is still a far cry from pre-pandemic 17.5 million. A lot of it had to do with lack of inventory as supply chain issues (especially semiconductor shortages) squeezed automakers.

Exhibit 5 – Housing & Autos

So a mixed year for the economy but given the backdrop of the global pandemic, things could be a lot worse!