Takeaways from our 2022 Economic Outlook Session with ITR Economics
The reference to "today's uncertain times" is seemingly everywhere you look. In strong times - and not so strong times - everything is always uncertain. What is certain is knowledge is power when trying to navigate these dynamics and continue to stay competitively advantaged and grow healthy businesses.
Below are several summary points shared by ITR Economics’ CEO Brian Beaulieu at our recent Allied Executives Business and Economic Update Session. As always, stop to question and think through the key points in this session for their meaning to you and your business! Be skeptical. Question everything. Ask, "where is this coming from?". Ask, when a trend is there - what are you going to do with it?
On Inflation & Interest Rates
- Slowing growth in the US and the rest of the world indicates lessening inflation.
- Supply chain pressures will yield in 2023 and beyond.
- The Fed can't control food and oil prices. The war in Ukraine isn't going to end anytime soon. High oil and food prices will continue to be influenced and will continue to be a fact of life.
- Expect day-to-day volatility in the stock and bond market.
- Budget for lower inflation in 2023 and 2024
- Ask - how susceptible are the markets you sell into to rising interest rates?
- "What we are experiencing today - a slight pullback of our GDP, inflation, higher interest rates - are the results of a "COVID Echo." Not due to COVID itself, but our government's response to the pandemic."
- "Inflation will come down, but it doesn't seem like it will come down fast enough given the Fed's interest in pushing interest rates relentlessly higher."
- "Core inflation (consumption expenditures Index sans food and energy) is on the way down. It has been decreasing since April. Further, we expect we will enter a period of "disinflation." It is already happening with many commodities. Don't be so quick if you are in a business where commodities are part of your inputs to lower your prices as you see your material prices decrease. Keep some of that pad for as long as you can.
- "When short-term bond rates surpass long-term bond rates, that is called an inverse yield curve. If this happens, you will hear every news outlet declare a recession. However, the inverse must be in place for two consecutive months for it to be a sure-fire recession signal. Without this period, it is not a statistically significant event. Suppose an inverse were to occur for two consecutive months; then the mean lead time for a recession is 15 months. So, if it were to occur, you would start feeling the pain much later than you think. Don't panic along with the media. You will have time to adjust."
US Macro Economic Trends
- Consumer economic health is generally good
- Leading indicators suggest sluggishness, but there are green shoots of growth developing.
- The COVID (inflation, higher interest rates) echo will impact different markets to varying degrees.
- Interest rates could be a problem in 2024.
- Use personal real estate prices as an inflation and recession hedge.
- "Wages, after adjusting for inflation, are at an all-time high. As the strength of the US consumer goes, so will our economy."
- "If things were manic during the pandemic for your business, and it feels soft right now, that is the Peloton effect. Your business was riding the response to COVID."
- "Interest rates are still relatively low. They will be going higher because there will be more inflation in the future. The economy is going to grow in 2023. It may falter in 2024, but that is up to us. On the other side of that faltering economy, we will grow for most of the remainder of the decade."
- "Invest in multi-family housing units. During periods of inflation, MFHU tends to rise. Talk to your financial planner and determine how to get into this nice inflation hedge."
- "Housing starts lead CML Construction by 25 months. CML Construction is a good market for the next two years."
People and Wages
- Employees have the leverage.
- The magnitude of wage increases will diminish in 2023.
- Philanthropy, training, flexibility, respect, and career path - are the key to attracting and engaging the younger generation (aka - the future of your business).
- People need to know their career path.
- Tune up your culture.
- Focus on geographic growth markets based on economics and demographics.
- "Philanthropy must be a strategy to attract young workers. Show them how you improve the world."
- "Labor shortage will not end anytime soon. We need a pro-business, documented immigration program to change this situation. It is a population problem. Automate!"
- "When it comes investing in automating because we can't find people; when it comes to improving efficiencies through technology investment - if you have to borrow money to do it, borrow money to do it. This money is still cheap, even at 4%. We are still in stimulative mode. Borrow money at a fixed rate. Pay it off by the end of the decade. Use it to buy wealth-producing assets."
- We are much closer to the bottom than the top. If you have not already cashed out, ride it out. Don't put more cash in.
- When it turns, it will turn fast. It will be a double-digit, low-to-mid-teens climb. It'll last 12 to 18 months, then be over.
- Be ready and have dry powder available to put on the market when it turns around.
- Because of inflation, talk to your planner about diversifying into commodities - real estate and others.
- Expect another eight months of downward pressure.
- "Don't "own" the market right now. You want to own certain sectors of the market."
Preparing for the Future
- Supply Chain pressures are easing.
- Inflation is coming down but will not go away. Our ongoing deficit spending, labor shortage, and monetary policy will ensure that.
- The US consumer is in good shape and poised for more spending.
- The FED will likely break this rising inflation trend.
- The best thing you can do is focus on being the best in class in your business and skill - this is your ticket to holding prices higher and remaining healthy.