Don’t Look in the Rearview Mirror to Drive Forward

At ITR Economics, we notice a difference between firms that have been working with us for years and those that are just starting to work with us. The former look to leading indicators and our forecasts to make decisions, and the latter try to drive their businesses ahead while looking in the review mirror. Why? It’s human nature to let the past days, weeks, and months influence your mindset today. What's dangerous is when that mindset colors the decisions you make for the future. So what future should you be planning for?  

What We Know: Slowing Macroeconomic Growth Is Coming in 2022

Eleven of the 12 key leading indicators we track are declining. That means key macroeconomic benchmarks – ranging from US Real Gross Domestic Product to industrial sector activity to retail spending to wholesale spending – are on track with our forecasts for slowing growth in 2022. Along with slowing growth comes a series of realities you need to be preparing for:

• Segments that tend to lead the overall economy – such as single-family construction and capital equipment orders – will tend to see the most dramatic falloff in growth rates next year.
• Sectors that tend to lag the overall economy – examples include nonresidential construction and oil and gas – will likely see higher growth rates in 2022 than 2021.
• Inflation and supply chain constraints will ease somewhat in 2022 as demand softens, but the situation won’t be suddenly snapping back to pre-pandemic norms.
• Our longest-range leading indicators and long-term business cycle theory suggest 2023 will also be characterized primarily by waning business cycle momentum.

Why We Expect a “Soft Landing” for the Economy in 2023

When we say the words “slowing growth” or “business cycle decline” in our presentations, we know it sometimes elicits a visceral negative response. Let us reassure you: we expect a so-called “soft landing” – i.e., no recession – this cycle for US Real Gross Domestic Product and major segments of the economy such as retail spending, capital goods orders, and single-family housing. This is due, in short, to the financial strength of the US consumer, the primary driver of US economic activity.

Looking deeper, while some consumers have been hurt by job losses during the pandemic period, the labor market has rebounded rapidly. There were 10.7 million job openings in August, a 45% increase over the August 2019 figure. Further, consumers who kept their jobs through the pandemic – and that’s most of us – have generally paid down bad debts and set aside money. This means they will be able to borrow more and tap into savings to fuel future consumption, which will help the economy avoid a “hard landing,” or recession, at the bottom of the business cycle in 2023.

Make Your 2022–23 Plans with the Future in Mind

Companies also often overinflate their expectations at this juncture of the business cycle, when industrial activity is late in the accelerating growth phase. Start adjusting your mindset to business cycle decline. Most companies should prepare for a “no recession scenario" in 2023, so you’ll need to ensure you have the people, processes, and equipment necessary to meet rising economic activity. Ensure staff at all levels of your firm understand this nuance of upcoming cyclical decline but not recession. By walking this fine line, you be driving your business forward. You and your employees will be navigating via the front windshield rather than the rearview mirror, and you will be able to maximize your profits accordingly.