The U.S. economy is currently going through two transitions. First, the economy is slowing down: GDP was 5.7 percent last year and it’ll be somewhere between 2 and 3 percent this year. Two, interest rates are climbing as the Federal Reserve enacts rate increases that could continue through the balance of the year.
“That would characterize the economy as bumpy as the economic growth rate comes down and interest rates go up,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.
While there are still areas of strength that can be found in the market, the coming turbulence will likely require companies to adjust their plans for the year, and possibly beyond.
Smart Business spoke with Altman about the state of the U.S. economy and how changes within it could affect middle-market companies.
What strengths and weaknesses exist in the market?
Jobs numbers are still favorable. Company profits, employment profits and demand remain strong. And though GDP is declining, a rate of 2.7 percent is still healthy.
Employment numbers have stayed fairly strong, but the tight labor market continues to create issues employers could face for multiple years, something that’s not exclusive to the U.S. There also continue to be issues with supply chains. That’s in part because China has been essentially closed for months as it deals with the virus. Getting China back open will help supply chains, but it’s going to take some time for that to happen. Additionally, inflation has become an issue as companies continue to raise prices to keep up with increasing costs.
How is labor affecting the market?
When it comes to the labor markets, one issue is that there is a mismatch in skills — the skills companies need are often what those who are unemployed don’t have. Additionally, the great resignation has been accelerated by some 11,000 people turning age 65 in this country per day. Still, there seems to be a delay in getting millennials to replace those baby boomers who are resigning, even though as a population their numbers are about the same.
Remote work has also become a factor. The shift has helped some influence move from employers to employees as their job opportunities ostensibly increase beyond commuting distance. And there are also different effects based on industry. For example, it could help technology become a significant area of growth, particularly in the Great Lakes region. In other industries, there have been wage gains at entry level jobs — entry level jobs have doubled in pay over the past three years. That seems to be flattening out now. This has put more emphasis on retention and training.
How do you see the year playing out?
Talk of a recession as early as the end of this year is growing louder. However, there are factors that suggest a recession this year has a low probability of occurring. For example, employment is still growing, houses are still selling, as are cars, although all at a slower pace. While that suggests areas of depreciating growth in the economy will come together and stay with us the second half of this year, that doesn’t seem certain. However, there could be recessionary trends within some very specific industry groups — retail, for instance, as consumers shift spending away from goods to services, especially travel. But over the next six to 12 months, it’s yet unclear how high the Fed is going to take short-term interest rates or how that will play into the odds of a recession. It’s something to watch, but doesn’t seem imminent at the moment.
Against these issues, business should look at their second half order book for the year and work to drive demand as much as possible because there will likely be some tailing off, especially with gas prices crossing an average of $5 per gallon across the U.S. Another area of emphasis should be talent management. Companies should carefully consider their plan to attract and retain employees in this tight labor market. For those who are paying higher wages to retain or attract employees, ensure your productivity is going up as well. ●
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