The economic forecast for 2022 projects continued strong demand, but labor shortages, supply chain disruptions and inflation are significant headwinds to monitor. Positives include a decline in unemployment numbers, rising wages, a booming housing sector, fat corporate profits, aggressive capital investment and generally easy capital sourcing.
“We are in the midst of an early economic recovery after the body blow of COVID-19,” said Bernard Yaros Jr., assistant director and economist at Moody’s Analytics (economy.com). “Though growth will decelerate in 2022 due to fading effects from business reopenings and past fiscal stimulus, the economy will remain robust.”
The numbers tell the tale. Moody’s Analytics expects Real GDP (Gross Domestic Product) to grow at a healthy 4.3% in 2022. While that is a bit less aggressive than the 5.8% of the past 12 months, it remains decidedly sunnier than the 3.4% pandemic-fueled decline of 2020.
Profits Grow, Economy Roars Back and then Decelerates
Businesses tend to benefit from a healthy economy, and Moody’s Analytics expects corporate profits to increase by some 4% in 2022. While that figure might seem unremarkable in isolation, it represents a hefty advance over the difficult comparisons of 2021, when profits spiked 36%. Clearly, business owners are glad to bid adieu to the pandemic-battered 2020, when their profits declined 3%.
Headwinds, of course, are inevitable. And 2022 will have its own troubling mix. These include: the peekaboo pandemic, labor shortages, crippled supply chains, China tariffs and spiking inflation leading to an unsettled consumer. Yet economists do not expect negatives to prevail. “While the Delta variant is continuing to do some damage, we expect this wave of the pandemic to soon subside and for any future waves to be successively less disruptive,” commented Yaros. “Labor and goods shortages will ease as the domestic and global economies increasingly learn how to live in a new pandemic normal.”
Furthermore, heftier earnings should help companies weather the coming year’s array of challenges. “Corporate profit margins have been running somewhat above their five-year average of 11.1%,” noted Yaros. “That should provide some ability to absorb price pressures that have developed from rising commodity prices and global supply chain issues.”
Pallet and lumber companies have been able to pass along rising costs for raw materials as well as labor. Many are reporting strong profits for 2021. But they are still concerned about long-term labor and supply challenges. Labor could become a much bigger problem if workplace vaccine and testing/masking mandates are enforced. See the article on page 70.
After a robust economy in 2021, overall economic growth is slowing. The Federal Reserve Bank of Atlanta revised its estimate of U.S. GDP growth for the third quarter of 2021 down to 0.2%. Not surprisingly, the trend has been slowing as the economy roars back to a more normal state. The recent revisions are well below economists’ forecasts. But experts suggest much of the slowdown is connected to supply chain disruptions not a lack of demand.
Inflation and Consumer Confidence
At the same time, consumer confidence can swing quickly when faced with changing realities on the ground. U.S. consumer confidence dropped unexpectedly in early November to its lowest level in a decade. Key drivers are rising prices for food, gas and housing as wages fail to keep up with spiking prices. The University of Michigan said its preliminary sentiment index dropped to 66.8 this month, a 6.8% decline. Survey chief economist Richard Curtin said one in four families suffered eroding living standards, but lower-income families were impacted the most.
President Biden recently pledged to make putting a lid on inflation a “top priority,” but Curtin attributed the dismal sentiment reading to “the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.” Not all consumer attitude indicators are negative. The Conference Board’s consumer confidence index rose in October, in connection with more positive attitudes towards the pandemic outlook.
Some economists are suggesting the Federal Reserve needs to raise interest rates to reduce inflation. Others believe the inflation pressures will subside when supply chain issues improve. But most experts believe that will take well into next year to see relief.
According to the U.S. Bureau of Labor Statistics, the annual inflation rate in the United States surged to 6.2% in October of 2021, the highest since November of 1990 and above forecasts of 5.8%. Upward pressure was broad-based, with energy costs recording the biggest gain (30% vs 24.8% in September), namely gasoline (49.6%).
Is inflation transitory or here to stay? We will know soon enough.
Sales Recover
Business owners tend to confirm the economists’ sunny reports when it comes to sales and increasing demand. This certainly held true for most pallet and lumber companies in 2021.
“Most of our members have seen a healthy return of revenues and are doing about 90% of their pre-COVID business,” said Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvania-based regional employers’ group with more than 370 member companies (mascpa.org).
With its diverse membership in food processing, defense, fabrication, and machinery building, Palisin’s association is something of a proxy for American industry. “Our members are optimistic and expect current levels of demand to continue well into 2022,” projected Palisin. “They’re expecting to continue to hire, as well. Our annual wage and salary survey usually projects between 400 and 500 job openings for the coming 12 months. Now, though, the number is more than a thousand. So, we’re looking at a doubling of the usual hiring activity.”
Aggressive hiring is improving the nation’s employment level, a key driver of the consumer sentiment so vital to the nation’s overall business health. “Unemployment has been declining pretty steadily,” said Scott Hoyt, senior director of Consumer Economics for Moody’s Analytics (economy.com). “Jobs are being added at a rate that prior to the pandemic would be viewed as astoundingly good.” Unemployment is expected to be as low as 4.5% when 2021 figures are finally tallied, and should decline to 3.4% by the end of 2022, a level not far from the “full employment” conditions of the pre-pandemic economy.
Wage Hikes
Any tight labor market is likely to spark wage hikes — yet another driver of positive consumer sentiment. Today’s economy is no exception. “We have seen a significant increase in wages over the past year — as high as 20% to 25% for lower hourly entry-level employees or machine operators,” recounted Palisin. Nationwide, increases are running lower, due to normalization of wages in some industries. “In 2022 we’re looking at 2.6% growth in the employment cost index, compared with 2.9% for 2021 and 2.6% in 2020,” said Hoyt. (Economists consider the “employment cost index” as the best measure of actual wage rates.) Hoyt adds that “any risks to the accuracy of those numbers is probably on the upside.”
Pallet companies know the stress of keeping staff. It’s clear that employers nationwide will be shelling out more to retain workers in the coming 12 months. “In 2022 we’re looking at about 4.6% growth in wage and salary income, coming off a 7% increase in 2021, which was up from the 1.3% of 2020,” added Hoyt.
All that additional income should encourage greater consumer spending, a key driver of a healthy economy. And signs are that people have saved up considerable sums of cash that are ready to be spent. Throughout 2020 and early 2021, after-tax income rose much faster than had been anticipated prior to the pandemic. The reason was massive fiscal stimulus in terms of federal economic impact checks and expanded unemployment insurance payments. At the same time, consumer spending ran lower than anticipated. “People now have a huge amount of savings,” said Hoyt. “Furthermore, consumer credit card borrowing has been weak, leaving consumers more flexibility to borrow money going forward if they choose to.”
Construction Activity
Given healthy corporate growth, it’s little wonder business investment remains robust. “Our members in general are expanding, building new warehouses and manufacturing facilities and buying new equipment,” affirmed Palisin. “We are seeing a special uptick in the automation category because of the labor supply issue.”
Nationwide, the picture is the same. Moody’s Analytics expects capital investment to increase 8.2% for both 2021 and 2022, another welcome rebound from the 5.4% decline of 2020. Companies are giving a lot of attention to bolstering their intellectual property infrastructure. “Investments in information processing equipment and software is well above its pre-pandemic level as businesses have boosted their IT budgets,” commented Yaros.
The economy should also benefit from more spending on commercial structures. “We’re going to see more non-residential construction next year,” says Bill Conerly, principal of his own consulting firm in Lake Oswego, Oregon (conerlyconsulting.com). “It will be strongest probably in warehouses and light industrial, but also suburban offices.”
Fueling the trend: Ready money. “For the most part our companies are able to access funds for hard capital investments and lines of credit,” stated Palisin. “Financing has loosened up since a year ago when everybody was in a high state of uncertainty.”
On the residential side, housing starts have been running about 15% higher than pre-pandemic levels, according to Moody’s Analytics. The prediction is for full steam ahead. “Annual growth in housing starts will remain strong because of favorable demand-side factors, namely demographics and excess savings,” forecasted Yaros. Increases for 2022 are expected to top 11.9% — very aggressive by historical standards and slightly higher than the previous year’s 10.6%.
Eager consumers are bidding up the prices of single-family homes, and a general easing of mortgage lending standards is helping grease the skids. Housing prices for 2021 are expected to jump 17.5% — a considerable improvement over the previous year’s 10.4%. As for 2022, Moody’s Analytics expects increases to decelerate to 4.6%, thanks to difficult year-to-year comparisons.
Scarce Workers
As most employers will attest, today’s ambitious hiring initiatives are colliding with a scarcity of candidates. “Our members are having difficulty finding enough workers, especially for entry-level jobs,” lamented Palisin. “The average time-to-hire has doubled from what it was prior to the pandemic. This will certainly impact our member’s ability to take on new work or provide on-time delivery.”
Nationwide job openings recently topped a record-shattering 11 million — a huge increase over the 7 million pre-pandemic level. “The number one concern of businesses going forward will be finding qualified labor,” said Yaros. “There have never been so many open positions across every industry and government, but the need for more workers is especially acute in manufacturing, transportation, educational services, healthcare, and leisure and hospitality.”
The reasons for the scarcity are diverse. “There has been a significant drop off in labor force participation as folks were forced into retirement or are staying home to deal with childcare or other dependent care issues that are more difficult to handle in the current environment,” explained Hoyt. Some fear the risk of workplace infections. Others are not finding exactly the job they want. And many pandemic-shocked people are reassessing their life missions and pursuing new ventures.
A number of factors may help relieve the labor crisis in 2022. These include the end of bonus unemployment insurance, a declining effect from stimulus payments, an abatement of infections and changing attitudes toward the pandemic.
Supply Chains
The tight labor market is helping fuel another business headache: a global breakdown in the efficient distribution of goods. “Most of the time the root cause of supply chain disruption is a lack of sufficient workers,” stated Conerly. When people aren’t available to do the work, efficient production and transportation fall by the wayside. Cargo ships are piling up at ports, causing delivery delays and leading to widespread price increases for supplies.
The supply chain imbroglio has engaged a broad spectrum of industries. “Close to 95% of our members are experiencing supply chain issues,” said Megan Tanel, senior vice president of the Construction Sector for the Association of Equipment Manufacturers (AEM). “More than half say the issues are getting worse. There are transportation bottlenecks, materials and component shortages. For the vast majority of our members, these issues are both domestic and global. And they are causing huge constraints on production.”
The increased costs resulting from order backlogs and delivery delays are only exacerbated by the China tariffs. While businesses were expecting some relief from the Biden administration, so far there has been no move to change the status quo. “Tariffs on Chinese goods will likely continue,” suggested Conerly. “In fact, given the friction between the United States and China, it’s possible we could even get additional ones.”
The double whammy of supply chain disruption and China tariffs are causing some businesses to look at alternative regional or local sources. “Many businesses are no longer relying on any single supplier or global region for goods and services,” said John Manzella, a consultant on global business and economic trends, East Amherst, New York (JohnManzella.com). “They are building more diversified and reliable supply chains. Instead of buying in scale from two very large Chinese suppliers, they might buy in smaller increments from a half dozen suppliers located in different regions of the world. They may also utilize more long-term warehousing facilities. This strategy, which adds costs but reduces risk, will be extremely beneficial in protecting against the next pandemic, black swan, or trade war.”
Finding alternative sources, though, can be easier said than done. “Many businesses that would like to source domestically can’t find any vendor in the United States that can match Chinese prices,” admitted Conerly. “And Chinese companies have improved the quality of their goods significantly.”
Adding to this litany of woes is the Chinese government’s increasingly heavy-handed control of industry, stated Palisin.
The Year Ahead
As businesses enter the early months of 2022, business leaders need to evaluate their industry landscape. For pallets, it looks like more of the same although anything can happen in this COVID-
conscious world and a mid-term election year.
