U.S. companies generally, have very strong balance sheets hading into 2022. So do U.S. households. That means that there’s a lot of dry power available to drive economic activity forward this year. Also, the job market ended 2021 with some very strong numbers driving the unemployment rate down to 4.0 percent. Taken together, these factors are encouraging economic indicators for the U.S. business climate this year, but one that is still subject to the path of the virus.
Despite strong balance sheets, U.S. companies (and government agencies) are experiencing labor challenges, a situation that’s not likely to alleviate any time soon. Companies are also feeling complications from inflation and supply chain issues that are causing many to have trouble getting basic materials, driving up costs and forcing price increases.
Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about some of the expected opportunities and challenges for companies in 2022.
How are labor, supply chain and inflation affecting businesses?
Because of the labor challenges, it’s expected that many businesses will be forced to substitute capital for labor — they’ll buy machines to replace people because they can’t find people to do the job. That’s starting to spread more from the manufacturing sector and into the service industries as each struggles to meet demand.
Inflation is also top of mind for many business leaders. Commodity price inflation and supply chain disruption are rooted in part in emerging markets that are still having trouble with the virus — India and South Africa, for example. In our view, getting the virus tamped down in emerging markets will be the first step to calm the commodity prices and begin to repair disrupted supply chains.
Which industry sectors might face headwinds this year?
Looking at the S&P 500, there’s only one sector this year that has projected negative earnings growth and that’s the financial sector. The yield curve is expected to have a big impact on banks. And the shape of the yield curve keeps narrowing because of an active Federal Reserve. That means short-term rates are likely to rise noticeably, while longer-term rates may not. This is a challenge for many companies in the financial sector. The key here will be whether the Fed can get longer-term rates to rise, potentially in the second half of the year.
Some things that are seen as a growth challenge are what can be called the COVID stocks, which are those tied to consumer behavior over the past two years — online shopping, grocery stores, home service companies, etc. Those stocks may have challenges growing as consumers are physically out more in the economy this year (with a tamped-down virus), meaning more spending is potentially going to go from goods to services.
Broadly, what are some of the opportunities in 2022?
Post-COVID travel, tourism and retail — all sectors that struggled so much over the past two years — should see a benefit once the virus is sufficiently tamped down. Capital expenditures should also see an uptick as companies are expected to invest in themselves, particularly by buying machines to fill the gaps they can’t fill with people. This should be a benefit to industrial companies that specialize in heavy machinery, along with some technology companies.
Energy prices are likely to stay higher than expected this year as the transition continues from hydrocarbons to more sustainable forms of energy. That transition is going to be bumpy and prices will reflect that.
Another area expected to stay hot is M&A. Global M&A surpassed $5 trillion in 2021 for the first time ever, a figure that was reached mostly with small deals. It’s expected this year that many smaller businesses will leverage their unusually strong balance sheets to acquire other businesses. Companies should be ready to leverage those balance sheets to take advantage of the coming cycle of expansion in the economy. ●
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