Looking Ahead

By Greg Sitek

Because of the unique aspects of 2020 and 2021 looking in the future, 2022, is more of a challenge than it usually is. To help get a better prospectus the coming months I have taken excerpts of the Equipment Leasing & Finance U.S. Economic Outlook because it covers more than just construction. A link has been provided at the end if you would like  to view ELFF’s complete forecast.

Executive Summary

Equipment and Software Investment: E&S investment rose again in Q2 and is well above its pre-pandemic level. Business investment has remained strong despite emerging headwinds in the economy, though these headwinds could begin to weigh on investment later this year.

Momentum Monitor: Momentum monitor readings are now above the long-term average in all 12 verticals tracked by the Foundation’s Momentum Monitors, though several verticals have begun to show signs of deceleration as broader economic activity slows.

Manufacturing Sector: The manufacturing sector continues to face historically high levels of demand, although growth decelerated over the last quarter. Meanwhile, U.S. industrial output has been constrained by ongoing supply chain shortages and high input prices.

Small Businesses: Business prospects for Main Street have been tempered somewhat since the beginning of the summer as a resurgence of COVID-19 has reduced consumer mobility, spending, and confidence. Small businesses are also contending with labor shortages, supply chain delays, and inflationary pressures. However, firms are better equipped to manage these headwinds than they were last year thanks to healthy lending activity and a slow but steady rise in vaccination rates.

Fed Policy: Federal Reserve officials largely maintain that ongoing inflationary pressures are mostly temporary. However, officials have signaled that the Fed is ready to begin “tapering” its asset purchases soon, which would translate to tighter financial conditions.

U.S. Economy: America reopened for business this spring and early summer as vaccination rates rose and infections slowed. However, the spread of the Delta variant has dampened activity in some areas and has likely slowed economic growth significantly in Q3. Consumer confidence took a hit as people grew less comfortable with in-person activity, and business confidence has been dinged by inflationary pressures and supply chain issues. On the positive side, consumers have accumulated significant savings over the pandemic that should provide a financial cushion, for now. Factors to watch for the rest-of-year outlook include concerns of persistently high inflation, uncertainty surrounding fiscal policy, the potential for tighter financial conditions that could impact equity markets, and the trajectory of the pandemic.

Labor Demand

Historic hiring demand provides opportunities for workers

“The economic recovery has produced a broad-based surge in demand for workers. In July, job openings hit a series high of

10.9 million according to the Bureau of Labor Statistics. Unsurprisingly, openings were particularly strong in leisure & hospitality, trade, transportation & utilities, and education & health services.  Hiring demand is especially strong among small businesses: a net 32% of small firms plan to hire in the next three months according to NFIB, the largest share ever.  Further, 50% of small firms have job openings that they are not able to fill right now.

“Though demand for labor is robust, hiring has not been as strong as expected, suggesting a significant supply-demand mismatch. Workers are using this to their advantage, often negotiating better pay and more flexible working conditions. Indeed, according to the BLS employment report, between August and September average  weekly  earnings  for  private nonfarm workers increased by 1.2%, and on an annual basis average   weekly   employee   earnings   was   up   4.6%   in September.  By comparison, average weekly earnings were growing at around 3% Y/Y prior to the pandemic.”

Pandemic Trajectory

Has the U.S. finally turned the corner?

Though the Delta variant has produced some “breakthrough” infections in the fully vaccinated population, vaccines have succeeded in limiting serious illness and death and have helped trigger a strong economic rebound this year. Around two-thirds of Americans have received at least one dose, and this number continues to slowly rise.

However, it is not yet clear whether vaccination progress to date, combined with natural immunity, will prevent a new wave this winter. There are several factors that may lead to heightened transmission rates this winter, including:

•    Colder weather leads to more indoor activity (particularly in northern states), increasing the risk of transmission.

•    Most schools have returned to in-person learning and mask requirements vary by locality.  Until a vaccine is available for children under 12, family members of school-aged   children   will   be   at   higher   risk (though approval for children ages 5–11 is expected this fall).

•    Policymakers   are   reluctant   to   reimpose   operating restrictions in many parts of the country.

•    Heightened mobility compared to last winter and pent-up demand for travel and family visits.

Inflation Concerns

Higher inflation likely to persist in 2022

As Congress debates a historic set of spending measures, concerns that higher inflation will persisthave intensified. According to the latest NY Fed Survey of Consumer Expectations, the median one-year ahead expected rate of inflation was 5.2%, while the median three-year ahead rate was 4.0% —both series highs, and well above the Fed’s 2% target. Households’ rising inflation expectations appearto be well-founded: per NFIB, the net share of Main Street businesses that raised prices over the last three months rose to 49% in August, by far the highest share since the 1980s.

However, rising prices are not unique to small firms, or the U.S. economy. Prices are increasing around theworld thanks to higher energy and food prices, record-high shipping costs, labor constraints, and othersupply chain bottlenecks. These factors are showing few signs of easing in the near term and in somecases will stretch well into 2022.

All told, the longer it takes for COVID-related economic disruptions to work their way through theeconomy, the more likely it is that higher inflation will be here to stay. Though it is not yet clear howlong these factors will impact U.S. consumers and businesses, the question of whether high inflationwould be temporary or persist has clearly shifted toward persist, at least for the next six months.

To view the full report, visit: https://www.leasefoundation.org/industry-resources/u-s-economic-outlook/

For more information on the Equipment Leasing & Finance Foundation visit https://www.leasefoundation.org

This material appears in the February 2022 issues of the ACP Magazines:

California Builder & EngineerConstructionConstruction DigestConstruction NewsConstructioneerDixie ContractorMichigan Contractor & BuilderMidwest ContractorNew England ConstructionPacific Builder & EngineerRocky Mountain ConstructionTexas ContractorWestern Builder