2022 Q2 Economic Update
2nd Quarter 2022 Macro View of the Economic Environment
Since the beginning of the pandemic, over $5.2 trillion dollars have been pumped into the US Economy. The stimulus was successful in preventing catastrophic economic consequences. Unemployment is holding steady at 3.6%, wages are rising, and there are more jobs available than there are unemployed Americans. Coupled with robust consumer spending since the great reopening, it is easy to see why consumer demand has outstripped supply. Complicating the matter are continuing supply chain issues and the Russian-Ukraine war which in turn has resulted in rising inflation and higher interest rates.
Inflation has hit multiyear highs and could remain elevated at least through the end of the year. The Federal Reserve believes they can calibrate interest rate increases enough to take the steam out of an overheated economy without killing off economic growth. The recent 75 bps in June was the largest since 1994 and signaled a willingness by the Fed to stay the course until inflation slows. However, the recent 9.1% headline Consumer Price Index (CPI) inflation reading served to emphasize that inflation may prove to be more resilient than most market watchers want to admit. Expect interest rates to go higher through the end of the year.
As noted last quarter, most economic indicators we follow are leveling-off and they have continued to do so in the second quarter of 2022. Inflation should moderate (eventually) and move lower as demand lessens and supply chain pressures ease. However, it may take longer than was originally anticipated. We continue to believe the Fed will achieve an economic soft landing in 2023.
Retail Sales – which make up over 70% of US GDP – had been declining since the beginning of the year, marking five consecutive months of downward movement through May. However, the June reading jumped 1% month-over-month indicating consumer spending remains healthy. The labor market will continue to be tight and will work to the consumer’s advantage as disposable incomes continue to rise. However, those market segments that benefited from a boom due to Covid may be subject to declining sales that take them back to pre-pandemic levels. The consumer's financial strength and continued spending should provide the cushioning to avoid a recession in 2023.
Construction – We are revising our outlook downward for the US Single-Unit Housing market due to acutely higher mortgage rates and overall consumer inflationary pressures. We anticipate this decline will persist through 2022 and into mid-2023 before rising again. Single-Unit Housing Starts came in 3.9% above year-ago levels. However, Monthly Starts ticked down sharply in May with the month-over-month decline the second sharpest on record. With the prospect of interest rates continuing to rise, we do not anticipate any material improvement in this segment until well into 2023. Conversely, we anticipate US Multi-Unit Housing Starts to rise as rentals become more economically practical for some consumers.
Manufacturing – The US economy contracted at an annualized 1.6% during the first quarter of 2022. It is the first contraction since the pandemic-induced recession in 2020 as record trade deficits, supply constraints, worker shortages and high inflation weigh. GDP Annual Growth Rate is expected to be 2.5% for 2022. Also affecting domestic manufacturing, imports surged more than anticipated given high US inflation. We now believe the economic slow-down will persist through the end of the 2022 before picking up again in 2023.
Specific Items to Consider at the Macro Level are the same as last quarter:
Focus on preserving your margins amid this inflationary period. If your products are considered “luxury,” do you also have a lower-cost alternative to offer?
Ensure your expectations and business plans strike a balance between optimism (given solid consumer positioning) and a more conservative stance (given the impact of inflationary pressures).
Due to the likelihood of future inflationary pressures, quick-ROI projects that leverage fixed rates may still be attractive despite the year-to-date runup in interest rates.
Avoid linear thinking. This time next year, inflation will be at about half the current reading.
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.
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.