Another quarter, another Covid variant emerges. This time Omicron, which is more infectious but less severe than previous versions of the Covid virus. While there are nagging concerns, continued vaccination (and boosting) progress has thus far mitigated any new issues that could arise with the continuing evolution of the pandemic.
As has been the case since the beginning of 2021, the high-level themes have not changed. Primary drivers are continued economic growth and, while interest rates have inched up, they continue to be historically low. The service sector continues to recover from the near catastrophic effects of the pandemic to the point that the US economy is now at or above pre-pandemic levels.
Inflation continues to be heavy in the news. Inflations levels have far surpassed the Fed’s 2% target, with the Consumer Price Index rose 7.0 percent for the 12 months ending December, the largest 12-month increase since the period ending June 1982. The largest increases in prices were seen in Shelter, Used Car & Truck and Food. Meanwhile, the Producer Price Index rose 9.7 percent in 2021, the fastest calendar year increase on record. This is largely attributed to the sharp economic rebound that led to strained supply chains. While the numbers are historically high, moderation in the monthly data supports our view that consumer and producer prices will gradually descend through the end of 2022.
Last quarter we reported most economic indicators we follow are leveling-off and they have continued to do so in the fourth quarter of 2021. This confirms we are seeing a slowdown in economic activity through 2022 and into 2023. As we reported last quarter, the economy should continue to grow, but not as quickly as it has over the past year.
Retail Sales – which make up over 70% of US GDP – recorded a record high year-over-year increase, rising 18.1% from the prior 12-month period. This surge reflects the effects of the government stimulus measures that were put into place to alleviate the effects of the pandemic related shutdowns. With the economy continuing to reopen, we anticipate seeing continued strength in this metric through the end of the year and into 2023.
Construction – US Single-Unit Housing Starts were up 16.3% above year-ago levels. Our analysis indicates that strong consumer finances and low housing inventories will contribute to 2022 growth in this segment of the market. While growth in 2022 will not be as strong as 2021, Housing Starts will continue to rise into 2023. In the biggest change, Non-residential construction has made the turn into positive territory. Nearly all nonresidential segments we follow are rising including US Private Office Construction which was hit hard by the pandemic. We anticipate seeing accelerating growth in the nonresidential segments through 2022 as the commercial sector recovers.
Manufacturing – GDP is back to pre-pandemic growth trends, but the mix has shifted to favor more Goods related production. Revised 3Q21 Real GDP shows the economy expanded at a 2.3% annualized rate and 6.9% annualized for 4Q21. For 2021, it is estimated the economy grew at a 5.7% clip. As supply-chain disruptions continue, we anticipate Real GDP growth to slow to 5.5% in 2022. Despite the slowdown, this continues to show a strong economic recovery though the end of 2022 and into 2023.
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.
- Don’t let today’s problems make you lose sight of the future. Use your forecasts to help determine your future business needs.
- The labor market will remain a pain point in the coming years. Try to make strategic partnerships with schools to establish a pipeline of qualified applicants.
- 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 the client is in the Construction Industry, here are some items they may want 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.
- 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.
- Determine your own business’s lead or lag time to Construction. If you track concurrently with it, are you prepared for increased demand in 2022 and beyond?
- If you are in the non-residential sector, make sure your business has capacity for growth.
- Consider taking advantage of low interests now, as business-to-business activity is expected to rise through at least 2023.
If the client is in the Manufacturing Industry, here are some items they may want 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.
- Year-over-Year New Order metrics surpassed the previous record high in November, and the rise is expected to persist. Plan your hiring and capital purchases accordingly.
- Long-term interest rates won’t stay low forever. Make sure to utilize the currently low interest rate environment to invest in additional capital and efficiency measures where possible.
- Despite the mild declining trend in New Orders, they will be higher than the 2008 record high in the latter half of 2024. Ensure your quality control systems are up keeping pace with this rise.
- The Consumer may become more price conscious as inflation rises. Ensure you product offerings can accommodate that sentiment.