December 9, 2022

Hi, I’m Lauren Saidel-Baker, and thank you for joining me for this episode of ITR Economics TrendsTalk. We’re almost at calendar year end, so that gives us a good reason to look back before we look ahead to what’s to come in 2023. Now, entering this year 2022, there were three main challenges that I heard quoted time and time again from business leaders. The first was the supply chain, the second was inflation, and the third was the labor market. These three constraints or three challenges really were with us in different levels through the majority of 2022. So let’s look back. How have things changed? How have they improved or have they not improved and will still be with us in the year to come? Let’s take those in order.

The first is the supply chain. Now, despite all of the hindrances, all of the challenges that we faced this year, most supply chain metrics are in fact improving. We at ITR follow the global supply chain pressure index, which is finally coming down. That means less pressure in the system. Now, that level is still a bit above its 20 year average, so I’m not saying that every factor in the supply chain is completely fixed or completely normal quite yet. That’s especially true in isolated cases. Things like the semiconductor sector where we do see long-term resolution on the horizon, but it’s going to take a lot of re-onshoring. We’ve all heard about those massive semiconductor factories being built in places like Ohio, Texas, Arizona, to name a few, and those will alleviate a lot of these supply chain constraints.

But it’s not easy to throw a supply chain manufacturing facility up overnight, especially the tens of billions of dollars worth of construction that needs to take place. So we expect probably 2024 to be about the earliest that we start to see production rolling off those lines. In the rest of the world though, most sectors are seeing supply chain pressures mitigate. Again, there will still be that one component that’s still tough to get or some different pricing for specific areas, components, or inputs. But generally, we’re in a much, much better place than we had been in early 2022.

The second item on the list inflation. This was a concern for businesses, for consumers. We hit multi-decade highs in inflation levels across the producer price index, the consumer price index, and various other metrics. Now, we’re starting to see some nascent decline in these inflation levels. Not to say that we’re back to normal stance by any stretch of the imagination, but I also want us to remember that the past decade, really the post Great Recession period was a time of historically low inflation. So I think both as consumers and as businesses, we got used to that. It’s very much human nature to see normalcy in some trends that can persist for the better half part of a decade. So getting to these high levels again was shocking to us. I think we all got a little collective whiplash in seeing inflation levels rise quite so quickly and quite so high as they did this year.

The good news though is that we are seeing those early signs of disinflation. And I’m being very intentional here, I want to say disinflation, not deflation. There’s a critical difference between the two. Disinflation is a lower but still positive rate of inflation. That means price levels are still increasing, but not nearly as quickly as they had been at the peak of the cycle. Deflation on the other hand, that’s a different case altogether. Deflation is when price levels go down. We will see, again, isolated pockets of deflation. Right now we could point to steel prices or copper prices, a lot of commodities are in an outright deflationary trend, but generally our expectation is disinflation for most major items.

So those first two items are trending in the right direction. We’re seeing, again, some mitigation, some lessened pressure. As Meatloaf said, two out of three ain’t bad. But unfortunately, we do have that last husky leg of the trifecta stool, that labor force challenge. And hiring has been just such a critical issue for so many businesses. In fact, I’ve heard that their most common constraint shifted from the supply chain to the labor market as say the supply chain eased up a bit. Maybe we were stopping activity, stopping production because we couldn’t get in components. Once we finally got those components in, we thought it would be smooth sailing until we realized, well, we didn’t necessarily have the people in place to use those components on the production line. Now, unfortunately, Meatloaf isn’t exactly right in this case. That last challenge, the labor market challenge is going to be with us through the rest of this year, through 2023, and really through the foreseeable future. We do expect hiring to remain a challenge. We just don’t have the people necessary to fill all of these job openings across our economy. So this will remain a constraint.

I know it’s fallen out of the headlines. We talked so much in 2021 and earlier this year about the so-called Great Resignation. All of these people quitting jobs or going across the street to the competitor. That trend, I would say, I don’t see in the headlines nearly as often, but that doesn’t mean that the challenge itself is gone. So if you have been focused on hiring or on retention, even better to retain your existing productive workforce, don’t let up on the gas pedal. Now is not the time to lose focus on your people. They’re going to be the critical part of your business going forward, and that constraint, again, is going to differentiate a lot of businesses. Those who are successful and can outperform this cycle are probably the ones investing in their people and investing in their labor market capabilities.

As always, this will vary based on your own business and your own leading indicators so don’t lose sight of those as we enter 2023. Thank you so much for joining me today. I wish you a happy holiday season and a very prosperous new year. For ITR Economics TrendsTalk, I’m Lauren Saidel-Baker. Let’s talk again soon.