Brian Beaulieu has served as CEO and Chief Economist of ITR Economics™ since 1987, where he researches the use of business cycle analysis and economic forecasting as tools for improving profitability.
2022 is not going to be a replay of 2021. Trends are shifting. Business leaders need to be aware of those shifts so they can properly interpret them and plan for them. Otherwise, profitability will suffer.
1. Leading Indicators Are Shifting From Rise to Decline
Our dashboard of leading economic indicators for the US is conclusively throwing off signals that the rate of rise in the US economy will be decelerating for 2022. Our international leading indicator dashboard is saying the same thing. The world will keep on rising in 2022, albeit at a decelerating pace.
The deceleration is logical. Stimulus efforts are no longer coming forth like they did in 2020. We see after-tax income trends normalizing and retail sales trends normalizing as a result. The economy of China is even further along this path of deceleration; don’t look for the world’s second-largest single economy to power the world when the US and European economies are growing at a slowing pace.
For most businesses, projecting demand in 2022 using the 2021 rates of growth will be a mistake unless you are somehow actively mining the marketplace while working to keep up with current demand. Expecting too much growth in 2022 will lead to a misalignment of budgets versus needs, contracts to buy inputs at prices that are too high, and stress on the bottom line.
2. Slowing Growth in 2022 Will Not Be a Bad Thing
Slowing growth in 2022 and likely through a good portion of 2023 will not hurt if you budget accordingly. The deceleration phase of the cycle will provide an opportunity for supply chains worldwide to “catch up” to demand. The supply chain debacle faced by many industries is rooted in governments overstimulating economies (stimulating demand in particular) and COVID restrictions impacting supply. Capacity is being built anew or built back up, and we think supply will more closely match demand as we cruise through 2022 and into 2023.
We think it best to live hand-to-mouth on input costs through the next four quarters. We are already seeing the back side of the pricing cycle associated with the global economic cycle. Continue to get price increases from your customers whenever and wherever you can, but understand that in the vast majority of instances the supply-side pressures should be either easing or at worst stabilizing. Pricing today could yield better-than-expected profits a year from now if you can be aggressive.
3. Expect the Stock Market to Be of Concern
Our analysis shows an 80% probability that the S&P 500 is going to shift into at least a correction, if not full cyclical decline (lasting longer than a simple correction), most likely in 2021, with the issue(s) extending into 2022. The median input puts the high in November 2021, but it wouldn’t be surprising to see the peak come sooner than that given how overpriced the stock market is.
When/if you see the market’s rising trend has stalled, don’t think it is the beginning of the “big one” that some people are fearful of. From a macroeconomic point of view, we think it is too early for this to be much more than a correction. What do you do about it? Have cash to buy back into the market when the low occurs. Profit from the correction instead of being concerned when it happens.