Is a Recession Inevitable Now? Many forecasters are calling for a recession this year or next year and GDP contracted 1.4% on an annualized basis in the first quarter, down for the first time since early in the pandemic. But consumer spending, capital expenditures and residential investment all increased, signs that domestic demand remains solid, according to Institutional Investor magazine. The accepted definition of a recession is two consecutive quarters of negative growth. But the first quarter contraction was not actually broad-based enough to meet the National Bureau of Economic Research criteria for recession. Key indicators are consistent with continuing expansion, including manufacturing and services activity, employment, housing, financial conditions and business and consumer confidence. Expansion will most likely just be at a slower pace. Economic growth remains broad-based across the country as well. The labor market remains extremely tight and jobless claims are at their lowest level since 1969. Households and businesses have accumulated savings and cash reserves. According to Institutional Investor, when people have jobs and keep spending money it’s hard to have a recession. Concerns about a US recession stem mainly from the Fed raising interest rates, persistently high inflation, spillover from the Russia-Ukraine war and persistent problems in global supply chains. Historically, recessions start at a median of 25 months after the beginning of a tightening cycle, although in 1963, 1994 and 2015, Fed tightening did not lead to a recession. Parts of the economy that are sensitive to interest rates, including housing and spending on durable goods, usually respond more quickly to Fed hikes. A prolonged correction in home prices could lead to a negative housing-wealth effect and deepen a recession. The war and CV19 lockdowns in China also contribute to risk. If inflation remains high, the purchasing power of consumers erodes and can lead to stagflation. Institutional Investor considered all factors and projects there will not be a recession this year, but risks increase in 2023 and beyond. Prices for Residential Construction Materials and Services Climb The prices of goods and services used in residential construction ex-energy (not seasonally adjusted) continued to climb in April, according to the most recent Producers Price Index (PPI). Building materials increased 0.5% in April, following upwardly revised increases of 1.9% and 2.4% in March and February, respectively. That means the price of building materials has risen 4.9% this year and is up 19.2% year over year. Building materials’ prices have risen 35.6% since the start of the pandemic. The PPI for softwood lumber (seasonally adjusted) declined 15.6% in April following a downwardly revised 5.4% increase in March and a 2.5% gain in February. As a result, the index is down 8.9% over the first four months of 2022. Since reaching its most recent trough in September 2021, prices have risen 60.4%. Steel mill products prices climbed 2.4% in April, the first monthly increase since December 2021. Nonetheless, the first four months of 2022 have been positive for the cost of derivative steel products, which rose 128.0% in 2021. The price index of services inputs to residential construction rose 0.9% in April. However, the index was upwardly revised for March, causing the monthly increase to jump from 3.2% to 6.8%. As a result, the price index of services used in home building (including trade services, transportation and warehousing) has climbed 13.3% since the start of the year. Year-over-year, the index has increased 18.1% and is up 45.6% since the start of the pandemic. Gas Prices and Inflation Threaten Back to Work Workers who were anxious to return to the office are now rethinking their options as skyrocketing gas prices make commuting more expensive. Paying for lunches and trading in their pandemic-era sweats for office attire are also impacting people who got used to commuting to the office in their spare bedroom. A Harris poll conducted for USA Today showed that 78% of employees were concerned about being able to afford the price of gas for their commutes, 72% were worried about the price of food and 38% were concerned about the cost of using public transportation. Millennials and parents with younger children were the most concerned, with 83% of employees with children younger than 18 worried about gas prices, 78% worried about paying for food and 62% worried about the costs of childcare. Office occupancy dropped to a pandemic low of 14.6% in mid-April 2020 but was up to 43.1% in mid-April 2022. About 86% of Americans drive to work, with the average commute totaling 32 miles round trip, which can add up to another $5 a day for workers. This same survey showed that the main reason people want to go to work is to see colleagues or clients in person. To make workers happy and try to retain them during this time when many companies are struggling to hire, 63% of employers are offering at least some employees a one-time bonus or overall pay hike to cope with inflation; prior to this year, most companies gave merit raises rather than cost-of-living increases. Inflation at 8% year over year amounts to a pay cut for most workers. Brands Winning D2C Ecommerce Established brands now account for 75.5% of the US Direct to Consumer (D2C) ecommerce market, and their sales and influence is expected to continue to grow, according to Emarketer. Analysts forecast that sales from established brands will grow 22.6% this year, ahead of the 17.5% sales growth expected from disruptor brands, which is the term that refers to digital-only brands. Amazon Invests in Emerging Tech Amazon is determined to win more of the ecommerce market whether the brand is distributed through brick-and-mortar physical outlets or exists only in cyberspace. Amazon will invest $1 billion in companies across the fulfilment, logistics and supply chain sectors in an attempt to capitalize on emerging technologies and own more of the market. The first investments of their industrial innovation fund include Agility Robotics, which makes bipedal robots for warehouses, Modjoul, which makes wearable safety tech; Vimaaen, which uses computer vision to manage inventory; BionicHIVE, an automated shelf-stacking robotics startup; and Mantis Robotics, which is developing a tactile robot arm. Buy America Causes Controversy New White House guidance fleshes out the Buy American provisions of the Infrastructure Investment and Jobs Act (IIJA). Associated General Contractors of America (AGC) has come out with strong criticism, but US steel organizations have been very supportive. The guidance issued in mid-April affects all federal infrastructure programs and federal assistance after May 14. Manufactured in America products must have at least 55% domestic content as measured by their costs. There is some wiggle room for steps that would not be in the public interest or if there are insufficient quantities of US-sourced iron, steel, manufactured products or construction materials, or if applying the provision would raise the project’s overall cost by more than 25%. Waivers need to be approved by the Office of Budget Management (OMB) which AGC says will create an administrative logjam of massive proportions. Steel producers are supportive because enforcing the provision will ensure more use of steel made in America. Consumers Want to Shop In-Store More than 85% of consumers plan to do more shopping in store this year compared to 2021. People like seeing options and choosing products in person, seeing what’s new and taking advantage of the staff’s expertise, according to the new Chase Design 2022 Shopper Sentiment survey, which surveyed 1,000 consumers between the ages of 25-54 who were either the primary or secondary shopper in their household. Online ordering volumes and services that boomed during the pandemic like BOPIS are slipping a bit from their 2021 highs. ChaseDesign says successful retailers will make the information consumers want available seamlessly through all channels. Shoppers cite self-checkout as the most used tech tool at physical retail, with more than two-thirds of respondents using self-checkout at least occasionally. About 44% use the retailer’s shopping app and 29% use QR codes, all up from previous surveys. ChaseDesign recently worked with Walmart and Coca-Cola to redesign the checkout area to improve shopper flow and enhance grab ‘n go purchases. Scan and Go is also gaining traction, with consumers using an app to scan the merchandise they are purchasing and then just walking out of the store when they’re done. © Robert Bosch Tool Corporation. All rights reserved, no copying or reproducing is permitted without prior written approval.
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