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Looking at the 2022 Slowdown

February 18, 2022

ITR Economics is forecasting a slowdown in 2022 - are you adjusting your plans accordingly? Catch our newest TrendsTalk episode with ITR President and Speaker Alan Beaulieu to learn more about the trends contributing to this year's forecast.



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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hello, everyone. I'm Alan Beaulieu from ITR Economics, and I'm happy to talk with you again today about the world, and what's going on in the world and how it might impact you. There's a lot going on, and there are a lot of things we could talk about. I'm going to talk about a little small piece of it right now, because I think a small piece is telling. We've been telling people for a long time that the economy was going to slow down in 2022. Not break down, just slow down in its rate of rise. And I think it's important that we keep our focus there and understand that so that we don't overrun our resources, so that we don't plan for 15% growth only to see 8% growth and wonder why we're not meeting our budgets, and all of our cashflow projections just fall apart. If our cashflow projections fall apart, we could easily find ourselves in a growth trend and running out of cash, and that leaves us having to borrow, et cetera.

So let's take a look at something. I think it's really important, and that's and subtle though, is retail sales. Retail sales numbers just came out, and on the surface, they look good, and they're not bad in way. Please don't get me wrong, but take away inflation and you come down to a deflated number, and the deflated retail sales, total retail sales saw a seasonal decline in the three month moving total that was a little steeper than we've seen over the last 10 years. When we look at just a month of January, just the raw number for January, what we see is something, a decline, 19.2%, that was steeper than the last three years. Should we look into that some more? So I did.

And what we find here is that when we look at retail sales, excluding gasoline, where we saw a lot of inflation, and we look at it on a deflated basis, now it gets to be even more telling. The three month moving total seasonal decline for January was 3.1%, which was the steepest since 2001, which was a recession year. So steepest January fall in the three month moving total, and the 1212 rate of change was shifted into tentative to phase C, slowing growth. You don't see that in the non-deflated numbers and you don't see that if you keep gasoline in there, but take away gasoline and you look at, people are spending a little less in terms of the rising trend with the decline in January, very seasonal January, was a little more than you might expect.

So dug a little deeper, and what we find out, there are some reasons for that. And one is that disposable personal income, which is your after tax income, is doing well, but it's the lowest in 12 months. The stimulus money really boosted disposal personal income, that now it's fading away and we're getting back to, well, for the nation, it's 15.377 trillion dollars. But how does that compare? Well, turns out it's incredibly normal. The rate of rise in retail sales has been astronomical, it's been a rocket ride because of all the stimulus spending, and I think a lot of folks are just thinking it's going to continue. The consumer spending, got nowhere to go, got nothing to do, and we're just going to keep spending it on retail sales. It's not likely to happen. If disposal personal income has calmed down, then why would it?

Now, it's above where it was in 2019, which got me to thinking, well, why? Then you look at the graph and you see that it tends to grow a little every year. So I took the growth rate of 2018 and 19, and applied it to the 2019 disposal personal income number, and it turns out our 2021 number is right on target with normal. So nothing bad happening, but nothing great either. Just enough to say we're returning to normal. Took it a step further and I looked at the personal savings rate. Now, the personal savings rate is at 7.9%. In 2019, it was 7.6%. So we're a little above that, a little above where we were before the whole COVID thing happened, and for the 10 years leading up to 2019 of 7.26%. So we're a little better than that.

Now, the personal savings rate is personal savings divided by personal income, and personal income is earnings, but it's also transfer payments, which means it's social security and entitlements and retirement funds that people receive, and it subtracts out everything that we expend. So it's everything that we have coming in, minus everything that we expend, rents and going to the store and gasoline and all the rest of that, and we're left with 7.9%. Which is a good number, but it's nowhere near as high as it was in '21 or in '20, because you guessed it, that the stimulus money is gone.

So we're seeing it settled back down into normal. Now, what's encouraging is that number's healthy despite the inflation that people have been fearing. It's like, oh my goodness, we're falling behind and the consumer is going to just be swamped and all the rest of that. But through the end of the year, our savings rate was actually good. And it's also gone down enough, so it says it's good, not great. So retail sales are going to slow a little bit, even on a deflated basis, they're going to slow, on an inflated basis, they're going to slow in terms of the rate of rise into a more normal place.

We're saving money. I'm glad for that. Disposable both personal income is up. I'm glad for that. And it's going back to normal. I'm glad for that. It means that things can settle down a little bit. Now, the next thing you're going to hear about the consumer is that, wow, jeez, when the fed raises interest rates, consumers aren't going to be able to pay their bills. I could just imagine the media saying things like that. What I want you to know is that today the household debt service payments, or I should get the title right, Household Debt Service Payments as a Percent of Disposable Personal Income. Isn't that a title? Is at 9.2%. And it's low, very low. So, the amount of debt service that we have every month compared to what we have coming in after tax income is exceptionally low. People can afford the debt they have.

Now, what I mentioned before is that when interest rates go up, you're going to hear people say we have a record amount of debt. Okay, but our income has gone up, and apparently we're handling that debt really well. Some may say, well, that's a function of stimulus, Alan, and that it's the stimulus checks that are allowing that to happen. That's not the case anymore. The stimulus checks brought that number down from well below 9.2, it's come back up, but it's still below where we were before COVID. We seem to be in a better place than we were before COVID. And you want to know something else? It hasn't been as low as 9.2% in over 40 years. We're not going to see ourselves crushed by a Federal Reserve Board rate hike 25, 50, 75, even a hundred basis points.

Some people aren't going to like it. Some people are going to slow down what they spend. Wait a minute. That's what we've been talking about. People are going to slow down in what they spend, and as they slow that down, it just means the economy slows at a slightly decelerating pace, slightly slower pace. And you just want to make sure that you plan your inventory, you make sure that you plan your capital expenditures, your cash requirements accordingly, and say, how do I take advantage of this? Well, maybe it's a function of stop doing things you shouldn't be doing. Make sure you're not in a business, product, service that doesn't make you any money. You're going to have restricted resources with labor. You're only going to have so much time. You might as well take advantage of it and stop doing those things you shouldn't be doing.

Maybe it's the time to look around for somebody who's going to run out of cash and say, that makes for an acquisition target. I know that company, it's a pretty good company. They just didn't plan this right at all. And as we go through '22 and into '23, you can start that dialogue. Maybe you say to yourself, interest rates are still low, but ITR is right, interest rates are going to be going up. The Federal Reserve Board has said they're going to be going up dramatically, more dramatically anyways, in the years to come. So maybe what you think to yourself is, how can I invest in my company to maybe do an acquisition or maybe just to automate or grow my efficiencies much greater than they were before? So that with those efficiencies, with the labor cost going up and later with interest rates going up, I'm borrowing now, putting it in place now, and I can increase my profitability as we go forward.

All right, so inflation will be coming back. The consumer's not going to be bothered by it for a while. Don't worry about it. I understand that the consumer is naturally slowing down. One more little note, just for fun. I think you're going to find that as the Fed raises interest rates, fairly soon probably at one of their meetings, then people are going to notice that inflation is slowing. I'd like you to note, please, that it already is slowing in the economy. It's not because of the rising interest rate. It's not because of the Federal Reserve Board, and they're great folks doing a great job. It's just the economy going back to a more normal pattern, things that we all understand and things that will allow you to be profitable. I'm Alan, ITR economics. Thank you for being part of today's TrendsTalk.


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