MHI Solutions Improving Supply Chain Performance
Economic Market Analysis
The economic and financial market landscape has shifted sharply in the past year. In the fall of 2021, there were many reasons for economic optimism in 2022, even with anticipated high inflation and Fed rate hikes. Looking ahead to 2023, the outlook is less positive.
The year 2022 has been generally good for the labor market, which saw a recovery in the unemployment rate to the 50-year pre-COVID low of 3.5% in July 2022, which marks one of the quickest labor market recoveries in history. But even as the U.S. labor market improved, growth weakened and consumer confidence fell sharply to record lows. The Future New Orders series for the MHI BAI by Prestige Economics also fell to record lows in 2022. Looking to 2023 and following weakness in several economic data series, downside risks to U.S. economic growth, business investment and material handling are significant.
Growth and the labor market
When U.S. economic growth contracted in the first half of 2022, weakness occurred in multiple essential parts of GDP for both the first and second quarters. We expect GDP growth to slow further in the GDP reports for the second half of 2022. Against a backdrop of falling GDP, U.S. jobs data have been solid for most of the year. On the downside, layoffs and jobless claims have risen, and higher interest rates threaten to weigh on business investment through the end of the year—and potentially into 2023.
The outlook for the labor market is also less positive for 2023 than for 2022. Strong jobs data have been better than GDP would otherwise indicate. Still, with relatively high interest rates, there are reasons to be concerned that business investment, manufacturing and material handling new orders and activity are likely to fall in the months ahead. Elevated capital costs could result in reduced purchases of material handling equipment and services, leading to deferrals, delays and cancellations of capital projects, equipment purchases, and the construction of warehouses and other structures.
Despite some likely slowing in material handling activity and the labor market nationally in the year ahead, labor issues could continue to be significant for material handling industries. If the U.S. labor market softening in the year ahead asymmetrically impacts white-collar roles, as we expect, then U.S. labor market weakness might provide little relief in filling critical positions for material handling, warehousing, transportation, trucking and logistics.
Even without labor market weakness, there could be significant challenges ahead for the economy. After all, if the labor market does not deteriorate and inflation remains high, there would be even more substantial upside risks to the cost of capital as the Fed likely continues to raise interest rates. These increases in interest rates would exert further downward pressure on economic growth and activity in the quarters ahead, potentially triggering a worsening economic recession than what has likely already begun.