Looking Ahead to 2022 - Budget Season

As business leaders, we adapt, and during 2021, we learned to maneuver around supply chain issues, accelerating prices, and labor shortages. Now it is time to step back from our day-to-day and budget for 2022, but we need to take care to avoid assuming the current business environment is a “new normal” that will persist indefinitely. To plan effectively, leave 2021 in your rear-view mirror and turn to forward-looking economic evidence for guidance. That evidence, including the system of leading indicators we track, is clear: we will be shifting to the back side of the business cycle in 2022. Our forecasts for US Industrial Production and most industrial markets call for slowing growth in much of 2022–23. This reality calls for a different set of business decisions. So what should we keep in mind while strategizing for 2022?

What Will Stay: A Tight Labor Market

Unfortunately, we don’t see much relief on the way for employers – skilled labor is going to be expensive and hard to find in the coming year. As enhanced unemployment benefits taper off, some workers may return to the labor force. However, this is unlikely to fix the tight labor market, which predates the pandemic. Budget for higher labor costs in 2022, for both hiring new workers and retaining existing workers. Closely monitor employee morale and be proactive in making your company a rewarding and enjoyable place to work. Additionally, invest in process improvements and automation to improve productivity. Focus on ways to scale your business without relying on extra hands.

What Will Change: Pricing and Inventory Management

Delayed by the pandemic and fueled by stimulus, consumer demand surged in 2021. Paired with production shortfalls during 2020, this has led to severe upward pressure on prices. Although we do expect inflation to be generally higher this decade than in the decade that followed the Great Recession, 2021's breakneck pace of rise of is unlikely to persist. We will likely reach a peak in inflation around late this year; 2022 will be characterized by disinflation (lower rates of rise in prices). Keep a close eye on your inventory turns and monitor your company’s rates-of-change. You don’t want to be stuck with the financial burden of an inventory glut after the frenzy of 2021 has passed. That is not to say that you should cut back on inventory; many markets will be at record levels. We are simply advising you to be careful and avoid making straight-line projections.

What to Avoid: Investments That Won't Drive Revenue Growth or Lower Your Costs

One of the errors we see businesses fall prey to in Phase C, Slowing Growth, is making poor investments due to overconfidence. Renovating your lobby is the somewhat clichéd example of using extra cash for a project that doesn’t add much value. Don’t shy away from investing in your future – just make sure you are investing in growth and/or profitability.

What to Do: Look for New Markets and Launch New Products

Consider using some cash or taking advantage of relatively low interest rates to invest in new markets or new products and services to help offset business cycle decline in 2022–23. Markets that will fare well include nonresidential and residential construction, automation, and heavy-duty truck production. Keep your competitive advantages in mind when identifying such opportunities. Prioritize those that match your existing skills and won’t stretch you too thin.