MT Magazine November/December 2022

NOVEMBER/DECEMBER 2022

FEATURE STORY

29

retirement age, and as time went on, more baby boomers exited the labor force, resulting in a downward trend in labor force participation. Following the COVID recession, the participation rate, already weakened from retirements, dipped dramatically and seems to have plateaued about one percentage point below the previous trend. While there are several possible explanations for the depressed labor participation, the net effect is an extraordinarily tight labor market that has resulted in large wage increases in a short period of time. Although these wage increases are not keeping pace with inflation, they go a long way in supplementing incomes to better adapt to an environment of rising prices. Unfortunately, these wage gains also increase inflationary pressures. While the cost of goods tends to fluctuate based on supply and demand dynamics, once raised, wages tend to remain elevated, prolonging their upward pressure on inflation. Inflation Takes Hold As a result of the unique demand dynamics described above, coupled with supply challenges, inflation took hold of the U.S. economy in a way not seen in decades. Despite aggressive rate hikes from the Federal Reserve, core inflation has remained persistently high and is projected to remain at an elevated level into 2023. By making borrowing more costly, the Federal Reserve hopes to reduce demand by enough that inflation will begin to reduce toward the 2% target without reducing it enough to trigger a recession. The side consequence of the aggressive interest rate policy is the strengthening of the U.S. dollar relative to other currencies. As this happens, demand for U.S. goods could fall off in favor of foreign alternatives. Given the supply chain issues in some markets, this may have a more muted effect than usual, but it raises the prospects that the trade balance will weigh down GDP in the future. As the United States imports more at a lower price and exports less because of the relatively higher prices, this negative trade balance will be subtracted from GDP. What the MTForecast Experts Say Tracing that economic path to the present, the economists at MTForecast predicted a modest decline in GDP beginning in the first half of 2023. Unlike the declines seen in the beginning of 2022, the economy is likely to find itself solidly in recessionary territory. As price pressures mount and credit becomes more expensive, consumers will begin to ease demand. The second half of 2023 will likely be positive, but the gains may not equal the decline of the first half, so the year could end down overall. A positive note highlighted by the forecasters was the likelihood the recession would be mild and quick. Given the massive number of job openings, the onset of a recession will likely be characterized by a decrease in hiring before actual layoffs, resulting in one of the lowest forecasted unemployment levels during a recession ever. This decrease in demand is also likely to help alleviate some of the supply issues that have constrained the economy since the onset of the COVID recession. This will allow many producers to chip away at their backlogs and accumulate inventories ahead of the rebound in demand during the second half. The conversion of those backlogged orders into deliveries

during the first half of 2023 means that there will be several areas of opportunity for manufacturing technology despite an overall economic contraction. Economists at MTForecast highlighted several industries that were in a position to increase their capital investment in the coming months. Many of these industries have benefited from recent government spending on infrastructure and procurement for defense. Although some industries are projected to fare well in the coming months, the path ahead is not entirely clear. The Federal Reserve’s singular focus on curbing inflation is designed to rein in overheated demand, but if taken too far, it could also begin to discourage capital investment reliant on financing. Thus far, the increases have been justified by the persistently tight labor market. Should data begin to show a decrease in job availability or an increase in unemployment, the Federal Reserve will begin to slow or halt their rate increases to balance the loosening of the labor market with the cooling of consumer demand. Economists at MTForecast projected the beginning of 2023 may see an easing of interest rate moves as the Fed attempts to tiptoe toward the inflection point of inflation rather than march past it, which would trigger a wider recession. Keeping an eye both on the monthly inflation report as well as job numbers will offer insights into the likely trajectory of future interest rate moves. The last few years have been characterized by conflicting data points, first-in-a-generation events, and a reassessment of how some facets of our economy work. Like the settlers of the past, St. Louis served as a gathering place to acquire tools, supplies, and knowledge before traveling into unknown territory. As we wade through uncharted economic territory, St. Louis once again served as the gathering place to share knowledge, gather tools, and chart a course into the future.

If you attended MTForecast 2022 and would like to access the ful l presentations, forecasts, and outlooks, just log in to your account at MTForecast.com. If you have any questions about this information, please contact Chris at cchidzik@AMTonline.org.