As the calendar flips to 2022, your ITR economists are recognizing a slightly different milestone. We expect many core segments of the economy to reach a business cycle peak during the first quarter of 2022. Put another way, our outlook for the majority of macroeconomic benchmarks anticipates that their rates-of-change will reach highs this quarter. Slowing – but still positive – growth will then take hold and persist into 2023.
The peak of the business cycle is an exciting place but also a precarious place. Many firms are immersed in the optimism and exuberance attendant to the peak while simultaneously grappling with the positive problems that accompany high growth rates. These include capacity constraints and supply chain logjams. A very natural reaction is to invest, or even overinvest, during this time. It is important to understand that as rates-of-change wane throughout 2022 to more normal and manageable levels, many of these positive problems will abate.
Meanwhile, Phase C, Slowing Growth, will bring a new slate of concerns and associated psychological effects. As new data comes in and confirms the cyclical transition, it will appear alarming at first. Our team has already noticed many alarmist headlines in the financial media. Loaded questions abound: "Has the recovery stalled?” “Is economic growth faltering?” With the US Industrial Production Index up 5.1% on a 12/12 basis and US Total Retail Sales up 18.1% (both in Phase B, Accelerating Growth), the answer would appear to be an unequivocal “No!” But as growth rates diminish for most of 2022 and into 2023, the hysterical headlines will seem less exaggerated.
Our advice remains the same: stay the course. We have long expected the upcoming slowing growth trend, and we remain confident that the macroeconomy is headed for a “soft landing,” in which growth slows but a recession does not follow. Use this time to catch your breath after the rapid rebound and positive problems of 2021. Identify and evaluate the new constraints your business will face ahead of the next accelerating growth trend in 2024.
Headlines may be unreliable, but the leading indicators will consistently point the way.
Lauren Saidel-Baker
Economist