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Why U.S. is due for recession this year

By February 22, 2023February 28th, 2023No Comments

(This column originally appeared in the Washington Times)

Last week the Bureau of Labor Statistics published its consumer price index, which, at a 6.4% annual rate, was more than most economists expected. But the real concern to me, as a business owner and adviser of businesses, isn’t the CPI. It’s the PPI, or the producer price index. That number was also higher than anticipated, a 6% annualized rate.

Why the concern? Because given how much prices have risen over just the past two years, the cost of making things is continuing at an increasing rate that, according to many of my clients, may soon be unsustainable for them. An inflation reckoning is on the horizon.

For example, if you’re a manufacturer, some of the key components you’re using are more expensive than ever. Steel piping is not just up 8% in the past year; it’s up 49% over the past two years. The cost of industrial chemicals seems to have flattened out over the past 12 months, but that cost is still up more than 31% since January 2021. Copper products and plastics and resins have seen their costs decrease since this time in 2022 but are 14% higher over the past two years. Iron and steel costs are down this year but are still up 30% since the same time in 2021. General machinery and equipment is up 26% since 2021, and even with the drop in some prices, overall manufacturing costs are up 7% this year and 25% over the past two years.

The cost of producing industrial gas is 18% higher than it was two years ago, lubricating oil and grease costs are up more than 38%, and natural gas costs 94% more. Fertilizer expenses are up 80% during this same period, and animal feed now costs 25% more.

Once products are made, they need to be packaged and shipped. And here, American businesses are also struggling.

Corrugated paperboard, which is used for most packaging, now costs 26% more than it did just two years ago (and 8% more than a year ago). Unlaminated polyethylene film and sheet, used for packaging and lining, now costs 33% more than it did in 2021. Deep-sea freight transportation expenses are up a whopping 61% from 2021, and the cost of long-distance trucking — although flat over the past 12 months — is up 33% over the past 24 months.

In the construction industry, the price of gypsum building materials is up more than 11% this year and 39% over the past two years. Cement and concrete costs 16% more than a year ago and 27% more than two years ago. Other construction materials have seen their costs drop by 6% over the past 12 months but are still up 25% compared with two years ago.

And then there’s labor. It’s true that hourly workers in private industry aren’t keeping up with inflation — their hourly rates increased just 4.4% this past year. That worker’s hourly wage, however, was $29.92 per hour in January 2022, and it’s now $33.03, so their employers have seen a more than 10% increase in their hourly payroll during this time.

But that increase pales in comparison with white-collar, salaried workers’. These workers, according to recent numbers from the payroll company ADP, have seen their compensation increase 7.3% over the past year if they stayed in their job. Those who switched jobs over the past year — as millions did thanks to the “Great Resignation” — were paid a whopping 15.4% more by their new employers — an enormous structural change to most companies’ overhead.

Sure, it’s good news that inflation appears to be plateauing, although many economists warn that we’re not out of the woods yet. I really hope these economists are wrong. Because the fact remains that the core costs of running a business in the U.S. today — materials, freight and labor — are significantly higher than they were just two short years ago.

No one expects their overhead to revert to pre-COVID-19 levels. This is the new reality going forward. Up until recently, my clients have absorbed most of these costs. But at some point, something has to give.

This is why, according to third-quarter numbers (the most recent) published by the U.S. Census Bureau, profits by U.S. manufacturing corporations were down $19.4 billion from the profits recorded in the second quarter of 2022 and “not statistically different” from the profits in the third quarter of 2021. I’m betting that the fourth-quarter numbers, when published soon, will reflect similar declines. These numbers are reflected in the Institute for Supply Management’s business conditions report for manufacturers, which has recorded monthly declines in its composite index of manufacturing firms’ metrics for the past seven months.

Even at current levels, continued inflation cannot be sustained much longer. Small and midsize businesses — particularly those in distribution, manufacturing and construction — have been able to navigate through these recent inflationary times, but their cost structures are significantly higher than they were just two years ago. They can raise prices only so much. There’s a limit to how much work they can get from their staff, and only so many technology improvements can be made before many will make some hard decisions and cut back on hiring and investment.

So far, the country’s retail and service industries have shown resilience and growth. But if our core manufacturing and distribution base cuts back on hiring and investing, that, along with much higher interest rates and credit card debt, along with the significant decline we’re seeing in household savings, will ultimately affect how much consumers spend.

Does this mean a recession this year? I think it does.

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