Macro View of the Economic Environment

The US economy balances in an uncertain position entering the second quarter.  In certain respects, the economy is on solid footing; the consumer is in good shape.  The labor markets are tight with the unemployment rate, at 3.6%, close to historic lows.  Jobs are plentiful and wages are rising.  While households have burned through the COVID-stimulus cash, their savings rate continues to be elevated, currently at 6.3%, which adds a level of cushioning should the economy turn south.  On the Corporate front, profits recovered quickly and are now well above pre-pandemic levels.  Business investment is continuing to accelerate and, with a growing trend to bring business operations back to the US, implies US economic growth should continue.

On the other hand, significant headwinds continue to buffer the economy and add an element of risk and volatility to the metrics we follow.  Chronic supply chain disruptions continue to exasperate the continuing growth outlook.  The situation was improving at the close of 2021 but new developments in the 1st quarter, significantly slowed the global economy.  The Ukraine-Russia war has slowed manufacturing in the Eurozone and continued lockdowns in China due to COVID, specifically to their major manufacturing regions, has significantly impacted business inventories resulting is rising prices for commodities, materials, and services.  Until these issues are resolved, expect any further growth to be tepid, at best.

Inflation is also casting a wide shadow over economic growth.  Inflation ended the 1st quarter of 2022 up 8.5% year-over-year.  Every sector of the economy was impacted by rising prices not seen since the early 1980’s.  The hardest hit component was the Food and Energy sectors where inflation rates were over 15.5% year-over-year.  While consumer sentiment continues to be positive, the rising costs for necessities will weigh on how they feel about the economy moving forward.  In fact, some recent surveys, those more focused on inflation, are now reporting consumer sentiment is now trending at levels consistent with a recession.

Then there is the Fed.  To ensure inflation does not get out of control, it will be raising interest rates.  Their task is to slow the economy to lower inflationary pressures while avoiding a recession.  Engineering a “soft landing” is something the Fed has struggled with in the past interest-rate hiking cycle.

Here is an update of where the primary metrics we follow when assessing the economy:

Retail Sales – which make up over 70% of US GDP – totaled $7.6 trillion in both February (up 20.9% YY) and March (up 18.7% YY).  This marks tentative transition to a slowing growth trend.  Disposable Personal Income, while still above pre-pandemic levels, is edging downward due to inflation and the phaseout of COVID-era stimulus.  This will likely slow growth in Retail Sales.  Despite slowing growth, this indicator will continue to rise through 2024.

Construction – Both Nonresidential and Residential construction are seeing slowing growth at the end of the quarter.  Residential sales are down 8.9% month-over-month.  We expect rising Mortgage Rates and declining personal income due to inflation, to continue to contribute to slowing growth in this metric.  As far as the Nonresidential construction sector, leading indicators point to a slight rise through the end of 2022.  Nonresidential construction is up 22.2% from year ago levels and, Warehouse construction is seeing above normal growth.

Manufacturing – Annual US Total Manufacturing in March was up 8.1% from one year ago.  Trends in a multitude of leading indicators signal an imminent transition to a slowing growth trend.  As with our other indicators, expect growth but at a slower pace for at least the remainder of this year.  Of note, the US Dollar is strengthening, which results in relatively cheaper imports.  This could decrease demand for domestic manufacturing.

 Specific Items to Consider at the Macro Level are the same as last quarter:

  • Keep a close eye on margins and profits, not just revenue, during this inflationary period.
  • Pricing pressures are front of mind.  Put price increases through early in 2022 to protect margins this year.
  • Some of the slowing growth in 2022 will be attributable to firms’ ongoing problem of finding qualified candidates to fill open positions.  Expect the labor market to remain competitive.
  • To capitalize on the continuing growth in the market, look for ways to differentiate yourself from your competitors and communicate these competitive advantages to your customers.
  • Take stock of your markets and identify which are interest-rate sensitive.  Develop a plan to combat the effects of higher interest rates your bottom line in future years.


    If you are in the Construction Industry, here are some items to consider:

  • Overall theme:  With the expected growth in this segment through 2024, consider building up your corporate governance structure so you are prepared to manage a larger and more complex business.
  • If your business trends with Construction, ensure you are prepared for increasing activity in the coming years.
  • While we can’t know the exact outcome of post-pandemic work trends, tracking demographic and migration shifts will aid in identifying regions of demand for Construction.  

    If you are in the Manufacturing Industry, here are some items to consider:

  • Overall Theme:  Be growth-minded into the middle of the decade.  Despite upcoming cyclical decline, New Orders will continue to see growth.  We are estimating year-over-year through 2024 almost 25% above the current year.
  • Stay atop all segments of your supply chain so you can adapt to new developments as quickly as possible.
  • When planning capacity and upgrades, be aware 2022 will see slowing growth.  Plan accordingly.
  • Consider implementing process improvements during this slow down before economic growth accelerates.
  • The Consumer may become more price conscious as inflation rises.  Ensure you product offerings can accommodate that sentiment