Preparing for the Next Phase of the Business Cycle
Planning and budgeting season is upon us. As you strategize for 2022, keep in mind that a different phase of the business cycle ̶ Phase C, Slowing Growth, ̶ will characterize the overall economy for the majority of 2022. Adapt your budgets, strategies, and preparation in accordance with and in anticipation of the shifting economic environment next year.
Where We Stand Now
Currently, US Industrial Production is in Phase B, Accelerating Growth. We at ITR often refer to this phase as the “best” phase of the business cycle, because during it we – as an economy or organization – are experiencing year-over-year growth at an accelerating pace. US Industrial Production represents the physical goods side of the economy and should resonate with NAW members trying to compare themselves to the overall macroeconomic cycle. If your organization correlates with the US Industrial Production Index, your sales or revenue figures likely have improved drastically, especially in the last six months. It’s likely, based on our leading indicators, that Phase B, Accelerating Growth, will characterize US Industrial Production through the second half of this year and the first quarter of 2022.
One of the biggest challenges of this phase of the business cycle is that we often lull ourselves into a false sense of confidence that the current market conditions will continue indefinitely. It is vital that businesses do not let their 2022 preparation and budgeting be colored by the phase of the business cycle a company is currently in, but by the phase of the business cycle they will be in for the following year. The US economy and demand pressures NAW members will be facing will look and feel very different at this time next year.
Where We Are Heading
US Industrial Production is set to peak, from an annualized growth rate perspective, in the early stages of 2022 and will then transition to a slowing growth trend that will persist through the balance of 2022. It is important to ground ourselves and recognize that slowing growth is still growth. However, the rate of increase will not present itself in the same overwhelming fashion that has challenged NAW members with unrelenting inflation, supply shortages, and logistical challenges this year. ITR anticipates a slowdown in inflation, easing supply chain pressure, and improved product and freight availability next year as cooling demand pressures allow the supply side of the economy to catch up.
What to Do
Avoid linear budgeting, which could result in a significant misalignment of resources. For those that correlate with the US economy, it would be a big mistake to assume 2021’s pace of growth will continue in 2022.
In the same vein, avoid linear demand planning and inventory management. Distributors have been living hand-to-mouth with supply in 2021, suffering from long supplier lead times, product allocation and thin inventories. As supply chains begin to free up next year, there will be a temptation to over build inventories as product finally becomes available. This will also coincide with the top of the price cycle and occur just as demand growth begins to cool. Inventory management will become increasingly important in the second half of 2022, as the macroeconomic slowdown becomes more apparent.
Look for counter-cyclical markets. While US Industrial Production and your business might be slowing, there are always lagging markets or markets that are counter-cyclical to your business that can help you mitigate the slowdown.
Connor Lokar is a speaker and Senior Forecaster at ITR Economics. He’ll also be presenting at this year’s NAW Large Company CEO Roundtable which will be held on September 21 -22. Few young economists present their insights with the authority, accuracy, and humor that Connor brings to the stage. From the intimate executive retreat to the standing room-only keynote, he delivers with charm and candor, rousing and enlightening all who attend his talks.
If you would like to attend the upcoming NAW Large Company CEO Roundtable, you can click here to learn more and register.