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2023 Economic Outlook

November 07, 2022
Publication
MRA Edge
Strategic Planning
Read time: 6 mins

Dr. Chris Kuehl is a Managing Director of Armada Corporate Intelligence. He provides forecasts and strategic guidance for a wide variety of corporate clients around the world and is the chief economist for several national and international organizations. Before starting Armada in 1999, he was a professor of economics and finance for 15 years—teaching in the U.S., Hungary, Russia, Estonia, Singapore, and Taiwan. He holds advanced degrees in economics, Soviet studies, and East Asian studies.

Dr. Kuehl is also the writer/editor of the Armada publication The Flagship, is an economic analyst for the Armada Strategic Intelligence System, and is responsible for the Credit Manager’s Index from the National Association of Credit Management and Fabrinomics from the Financial Management Association.

Dr. Kuehl spoke at MRA’s 2023 Economic & Market Outlook Conference on November 2 and shared some insight into what the economy may have in store for employers in the upcoming year.

Q: With the changes made to interest rates over the past several months, do you anticipate some industries will begin to start slowing down?

A: So far capital spending has continued to be way up at record levels, mostly in the manufacturing industry. To compensate for labor shortages, employers have turned to robotics, which increases the need for robotic engineers and specialists, as well as construction as they expand space to hold more inventory.

A decline may occur more in the service industry—in entertainment and leisure—though it hasn’t been seen yet. There is a sense that a reaction may come after the holidays. This industry is becoming cautious and is watching for people to begin spending less on discretionary goods or display reluctance to invest in their businesses right now. It will be more reactive than other sectors.

Q: Does it look as if there will be relief for companies that have seen large increases in the cost of goods due to inflation and supply chain issues?

A: The answer is different, depending upon short- and long-term views. Near future changes will be influenced by China opening up ports and ending lockdowns. Initially, when all the shipments hit ports again there will be tremendous congestion, but there will be relief once it all settles down. The long-term change will depend upon the reorganization of the supply chain, and more reshoring coming into the United States.

The practice of “friendshoring” has become popular as a way to reduce the effects of China’s closed ports. It allows countries to offshore with other countries they are “friends” with rather than being so reliant on China. The U.S. friendshores with Korea, Japan, and Taiwan. Taiwan has become one of our most valued friendports, although China is not in favor of this. Japan has a strong navy, is the third largest economy in the world, and has vowed to protect Taiwan’s interests if China should interfere. This has helped secure them as a continued friendport. Vietnam has also become a resource and allows the U.S. to use its ports because we helped rebuild them after the war.

Q: How is what is happening with the current economy different from what we saw during the 2007-2008 recession?

A: In 2008, there was a more classic situation based on the financial sector breakdown. There was an excess supply that demand didn’t keep up with. The current situation is reflective of a broken supply chain that cannot respond to demand. The demand is not any higher than at other times, the system just can’t deliver what is needed.

Q: Why does it seem to be taking so long for the supply chain to correct?

A: China continues to lock down its ports. They have a no-tolerance policy on COVID-19 and aren’t allowing anything to move. They also are not producing because they don’t have enough people. Once people report to work, they are not allowed to leave the facility due to lockdowns, which means they cannot see family. They choose not to work, which leaves manufacturers with no workers. Trucks are not able to come within a designated distance of the manufacturing facilities, and deliveries are dropped far away from docks with no one to transport them. With no workers and no supplies, many companies have closed their doors.

Q: What factors could have the greatest impact on inflation?

A: The two largest threats to inflation are oil and consumer spending.

If oil prices jump again, people will back off on spending. This means there is little tolerance for disruptions such as hurricanes or refinery problems.

Another factor is the way consumers change spending habits based on economic events. If consumers decide they don’t want to wait to buy or begin hoarding because of increasing prices, it will shift the stability of things. Everything is based on consumer response—one bad unemployment report will cause people to hold onto their money and save. Right now, employment is stable.

We are in a transitory state, which means we are dependent upon commodities, or the raw materials we need to make other products. When there is the potential that the war between Ukraine and Russia will end, we will begin seeing relief, if Russia begins contributing again. Steel and lumber prices are coming down, which is a positive sign.

Q: You write for The Strategic Intelligence System, a publication focused on the manufacturing industry. Have struggles with the supply chain differed between durable and nondurable goods manufacturing?

A: It is a little more evident on the durable side. Nondurable is the retail sector, so there has been variation tied to timing and seasonal items. In some cases, manufacturers who rely on the sale of seasonal items have been left with large inventories because the supply chain is off and the product is not delivered to coincide with seasonal demand.

Q: If we do find ourselves in an official recession, what industries do you suspect will be impacted the most?

A: Probably the more consumer-oriented ones, such as travel, hospitality, and retail. These industries will feel it the most and the earliest.

Q: What advice would you give companies to help build resiliency during turbulent economic times?

A: Most of the indicators are showing that if we hit a recession, it won’t be a long one, and recovery is predicted by the third quarter of 2023. Be mindful of costs for the near future and don’t hamstring yourself for recovery. One big mistake companies make is not responding fast enough by not cutting back in time, or overresponding and laying off people early, then not having the employees available during recovery.

We’ve been in this environment for two years. The feds will watch unemployment rates and as long as the quit rate is high and economic flexibility is low, the feds will try to slow the economy. When quits start to slow and unemployment begins to creep up, things will change. A lot will depend upon the unemployment numbers. The current economy still shows relatively low unemployment and layoffs haven’t started. Employers are worried about losing help if they lay off now and the economy stays stable, which is justified.

Employers need to choose a strategy for any economic development, but it is difficult to know which one. In the current economy, employers need to be prepared for anything because it is still driven by the black swans. It will stay this way as long as the supply chain isn’t in sync and gas prices are high. If any one thing changes, there could be a shift.