By Elliott Pollack, The Monday Morning Quarterback
Over the past two years we have dealt with the effects of COVID, supply chain disruptions, labor shortages, inflation, unfilled service jobs, and rising home prices and rents to name a few. And now there is war. A madman with his finger on the nuclear button has decided to conduct an unprovoked invasion of a neighboring sovereign nation. Tensions are high and there is much uncertainty as to where this is going. As of the writing of this MMQ, talks are underway between Ukraine and Russia. The outcome of those talks is not clear nor whether they represent a sincere effort on the part of Russia to end the war. The effects of the sanctions placed on Russia by the West amount to economic warfare, and they are significant, with a sharp decline in the value of the Ruble and the closure of the Russian stock market.
So, what does all this mean for our economy? No matter what the outcome is – whether Russia withdraws or continues its assault – it will take a long time to unwind the effects of the invasion. Energy, oil and gas, is the primary impact on the world and U.S. economies. Europe may take the blunt of the impact due to its dependence on Russia for fuel. For the U.S., we expect to see rising prices at the pump and this may continue for a long time unless alternative sources are found. Brent crude briefly rose above $100 per barrel for the first time since 2014 as Russia launched its invasion of Ukraine. But many observers believe the price of oil will continue to rise and could hit $125 to $130 per barrel by the summer because of the war.
The cost of energy is pervasive throughout the economy, affecting manufacturing, the distribution of goods, and household spending. A rise in gas prices at the pump is essentially a tax on the consumer and often the most visible effect of inflation. The Ukrainian war will exacerbate the cost of gas beyond what was anticipated before the invasion. All this will likely lead to reduced forecasts of U.S. GDP growth for the coming year.
The invasion of Ukraine now casts Russia as a global pariah equal in stature to North Korea. The long-term effects of the invasion and doing business with Russia in the future will be sorted out in years, not months.
And now for some somewhat better news.
- U.S. GDP was revised upwardly to an annualized rate of 7.0% from 6.9% in last month's estimate. The upward revision was due to higher than previously estimated non-residential fixed investment, state and local government spending, and residential fixed investment.
- Consumer spending rose even as prices continued to climb, while personal income remained flat in January. The economy began the year strong despite the Omicron wave. The Ukraine conflict could slow growth and push prices (gasoline) even higher.
- Consumer confidence fell in February as inflation concerns continued to affect the consumer’s psyche. The index was down 0.5% for the month but remained 16.1% above a year ago. Despite the slight decline, consumers remain confident about short-term prospects.
- New home sales dropped more than anticipated in January. On a seasonally adjusted annual rate basis, January’s level of 801,000 sales declined from 839,000 sales a month ago and 933,000 sales a year ago. Demand for new homes is expected to remain strong as the low level of existing homes persists.
- According to the latest S&P CoreLogic Case-Shiller Price NSA Index, Greater Phoenix continued to lead the nation in home price growth for the 31st consecutive month in December. Greater Phoenix saw an increase of 32.5% for the year compared to the 18.6% seen in the Composite-20. Tampa and Miami were the closest to Greater Phoenix, with a 29.4% and 27.3% increase, respectively.
- Total taxable sales finished the year strong, with a combination of strong consumer purchases and higher prices. For the state as a whole, retail sales were up 23% and 24.2% in Maricopa County.