This article is provided by ITR Economics in partnership with IMEC.

Between the war, inflation, the stock market, etc., economic news headlines have been overwhelming lately. Let’s break down recent movements and how they should inform your business decisions.

The Stock Market

Through April, the S&P 500 declined 13.3%, erasing roughly a year’s worth of gains. On a monthly basis, the 1/12 rate-of-change was negative for the first time in two years. Generally speaking, defensive and inflation-oriented investments are outperforming other sectors, such as technology. While near-term volatility is likely, peer cases suggest gains are probable one year out. Check out the ITR Equity Optimizer Model™ if you want more guidance.

Energy Prices

Russia’s invasion of Ukraine is impacting the normal supply-demand fundamentals of global energy markets, resulting in elevated prices. The US has banned oil imports from Russia, and the European Union, which is more dependent on Russian sources, is considering but has not yet implemented a ban. The US is experiencing higher oil prices, but due to domestic production the increases are not as drastic as in Europe. US Crude Oil Prices remained between roughly $95 and $115 per barrel in April and early May. More drastically, the March-to-April rise of 34.7% in US Natural Gas Prices is nearly double the previous record rise for this time period. Natural gas may be currently subject to greater pricing pressure due to exports of LNG to Europe. Plan for elevated energy and transport costs until the supply limitations are resolved – look to improve efficiencies to help mitigate these costs. If you have exposure to the O&G market, be prepared for rising domestic activity but keep in mind that production is still constrained by investors' willingness to finance expansion.

Mortgage Rates

Mortgage rates remain relatively low compared to prior decades but are rising rapidly. Rates were at a record-low 2.65% in early January 2021 and were generally below 3% throughout 2021. Since the start of this year, rates have jumped up, surpassing 5% during April. The Federal Reserve Board's recent increases to the federal funds rate, as well as anticipated future increases, signal that rise in mortgage rates is likely to persist. The financial status of US consumers suggests they are able to handle higher rates. However, if rates continue to climb rapidly, it would pose a downside risk to the housing market.

Despite rising mortgage rates, housing vacancy rates remain near record lows while housing costs are still rising, suggesting homeowners will likely continue to purchase homes. The majority of evidence points to growth in housing construction, although growth will slow into early next year. Those in the construction market should prepare to increase capacity, keeping in mind regional trends.

Inflation

April was a significant month for inflation. Producer inflation reached a 47-year high of 15.7%. Consumer inflation ticked down but was still elevated at 8.3%.

On the consumer side, major contributors to these record levels were nondiscretionary categories such as food and housing. Consumers may become more price-conscious as they feel the pinch of inflation and as the economy moves along the back side of the business cycle. Passing along price increase may become more difficult, so make sure you are communicating your competitive advantages and carefully managing your brand. If you are in discretionary markets, you may notice a more pronounced slowdown.

For producers, the war in Ukraine has exacerbated many preexisting global supply chain issues, contributing to higher US Producer Prices by way of elevated commodity and freight costs.

Overall, we expect prices for both consumers and producers to generally rise through at least 2024, but we anticipate inflation will begin easing by late this year. Focus on maintaining your margins through efficiency gains. Although interest rates are rising, it still may be worth it to borrow to invest in capacity and efficiency improvements – but be sure to do a thorough ROI analysis, and factor forecasts for your end markets into that.