Michigan fared better than the nation during the fourth quarter of 2021, according to the latest Citizens Business Conditions Index, although both numbers showed economic expansion.
Citizens on Jan. 27 published the quarterly national Citizens Business Conditions Index (CBCI), which was 54.35 for the fourth quarter, down from 57.84 at the end of September but still in expansionary territory.
Michigan’s Q4 index was at 54.82, slightly better than 54.08 in Q3.
The index draws from public information and proprietary corporate data to establish a view of business conditions across the country. An index value greater than 50 indicates expansion and points to positive business activity for the next quarter.
“It’s good to see (Michigan’s) slight uptick over the third quarter, given that the national average went down, and I think that’s just a testament to the resiliency of (the) Michigan economy coming back, and it’s also a testament to a lot of companies out there managing through the pandemic that now have a little bit more of a tailwind from the pandemic versus a lot of headwinds going into it a year-plus or so ago,” said Jim Malz, Midwest regional executive at Citizens.
Following particularly high readings in the second and third quarters, the latest index value reflects the demand momentum still driving business conditions. The CBCI has been in expansionary territory for five consecutive quarters.
“The vast majority of companies have successfully adapted to the pandemic. (Last) quarter, we started to see some overheating. That’s prompting an adjustment back to a more moderate pace of growth,” said Eric Merlis, managing director, corporate risk solutions, Citizens. “A slight pullback will help the supply chain continue to normalize and allow the labor market to keep adjusting, both of which are constructive for confidence levels.”
With increasing concerns about inflation and a new COVID variant surging late in Q4, there was considerable volatility. Supply chain issues continued, something the omicron wave might further aggravate.
“(If there’s another variant on the horizon) how is that going to impact people’s psyche and behaviors in terms of spending, and how can we better manage? You never know about that, but I think folks have pretty well prepared,” Malz said.
The strong demand experienced throughout the year carried economic activity along at a fast pace. The Federal Reserve announced changes to its policy outlook for 2022 to stave off excessive inflation.
“I think the biggest concern is (whether) the supply chain challenges will hopefully slowly abate over time as we roll into Q2 and the back half of the year,” Malz said. “I think it’s looking promising, somewhat, now that rates will likely increase, and so things may slow or temper a bit.”
Against this backdrop, three of the five underlying components in the CBCI were additive, while one was neutral, and one had a moderating effect.
High readings in the Institute for Supply Management (ISM) indexes for manufacturing and nonmanufacturing contributed to the positive CBCI value this quarter. As of December, the manufacturing index reflected some progress in supply chain and labor issues. The services index hit an all-time high in November, Citizens said. These indexes also capture sentiment, reflecting a broad confidence that continued throughout the economy in Q4.
Employment markers were neutral during the period, neither boosting nor pressuring the CBCI. Hiring activity continued its trendline, driving the unemployment rate down, while wage inflation ticked upward. New business applications were an area of relative weakness in the fourth quarter. However, Citizens said there was strength in the proprietary activity data of its commercial banking clients, which is an underlying component of the CBCI, as well.
Several trends solidified the recovery in 2021 and even drove the economy toward early indications of overheating. Excess savings have been a key driver of the high demand level. The fourth quarter saw signs excess savings finally have tapered off, and households slowly are returning to pre-pandemic behaviors.
Another key theme in the index data this quarter was business activity pulled back modestly from second- and third-quarter peak levels but remained steady. As policymakers work toward removing support, a moderating trend in business activity should help ease inflationary pressures, Citizens said. Though the pandemic’s impact continued, the fourth quarter brought signs of continued strength, alongside “reassuring markers of normalizing trends” in the economy, according to the financial institution.
Malz said he believes the biggest unknown affecting the economic picture moving forward is the geopolitical scene.
“If there’s an event or events, how does that impact the U.S. and our goods manufacturing base, consumer base, industry base and economic base here in the United States?” Malz said. “That’s a wild card right now we’re paying very close attention to, and a lot of our clients are talking about the same thing. We just don’t have a feel for what’s going to happen and hopefully (it will be) nothing too major or nothing too severe.”
Citizens is based in Providence, Rhode Island, and has branches in Michigan and 10 other states.
More information about the Q4 index is at bit.ly/CBCIQ42021.