Citizens reported that its Citizens Business Conditions Index (CBCI) dropped to a mark of 54.4 for Q4/21, down from 57.8 at the end of September but still in expansionary territory. Following particularly high readings in the second and third quarters of 2021, the Q4/21 index value still reflects the demand momentum that is driving business conditions. The CBCI has been in expansionary territory (higher than 50) for five consecutive quarters.

“The vast majority of companies have successfully adapted to the pandemic. This quarter we started to see some overheating. That’s prompting an adjustment back to a more moderate pace of growth,” Eric Merlis, managing director of corporate risk solutions at Citizens, said. “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-19 variant surging late in Q4/21, there was considerable volatility. Supply chain issues continued, something the omicron wave further aggravated. Still, the strong demand Citizens saw throughout the year carried economic activity along at a fast pace. Indeed, the Federal Reserve announced changes to its policy outlook in an effort to stave off excessive inflation. 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 non-manufacturing contributed to the positive CBCI value in Q4/21. 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. These indexes also captured sentiment, reflecting the broad-based confidence that continued in Q4/21 throughout the economy.

Employment markers were neutral during the period, neither boosting nor pressuring the CBCI. Hiring activity continued on its trendline, driving the unemployment rate down, while wage inflation ticked upward. New business applications were an area of relative weakness in Q4/21. However, Citizens said there was strength in the proprietary activity data of its commercial banking clients, which is another underlying component of the CBCI.

Multiple 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. In Q4/21, Citizens saw signs that excess savings had finally tapered off, while households were slowly returning to pre-pandemic behaviors.

Another key theme Citizens saw in the index data for Q4/21 was that 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. Though the pandemic’s impact continued, Q4/21 brought signs of continued strength alongside reassuring markers of normalizing trends in the economy.