Economic update for M&D: Inflation, recession, labor, and AI

What might the economy hold in 2024? How should M&D businesses respond? Read takeaways from an early 2024 economic update from Fifth Third Bank.

    two employees in manufacturing setting

    What might the economy hold in 2024? Continued inflation? Possible recession? And what should manufacturing and distribution businesses know and do with that information?

    Fifth Third Bank Chief Investment Strategist Tom Jalics recently shared with us an economic update, exploring what the numbers are saying and what they mean for the economy this year. Read on for our top takeaways.

    Outlook: Cautiously optimistic

    “Cautiously optimistic” is the prognosis Jalics gave for the economic environment in 2024. 

    We are in the latest stage of the economic cycle, from recession through expansion, indicating that a recession may be on the horizon – and yet the data indicate that the economy is improving, an unusual trend for this stage. Amid high employment, consumers continue to earn and spend; the GDP continues to rise; credit spreads are tightening; and stocks are going up. Overall, there is a case for optimism for continued growth.

    The cautious part is that the Federal Reserve does continue to raise the cost of capital, and we are likely not yet seeing the impact of those changes on the economy. The “long and variable lags” phenomenon of monetary policy means that it tends to take two to three years after interest rates are raised to see the impact on the economy – which means that we may start seeing the impact of these current raises this March, when we hit the two-year mark. Of the 12 periods of rate hikes since 1958, seven have been followed by a recession – 58%. And of the two cycles where rates were cumulatively hiked more than 5%, both were followed by recession. We are currently at roughly a cumulative 5.25%.

    Other than the prospect of a recession, top of mind for many people is inflation. While we are far down from the recent spikes near 5.5%, we are still about 50% above the Fed’s target of 2%, at just below 3%.

    The good news is that factors that have been driving up inflation are beginning to correct. COVID-era stimulus programs have ended, meaning we will no longer have “too much money” in the economy. Supply chain issues are resolving; transportation costs are coming back down; and commodity prices, while still high, are no longer rising as they had been. 

    However, we are also losing some of the factors that traditionally drive inflation down. Of what Jalics called “the Four Pillars of Disinflation,” we’re currently only seeing two: 

    • An aging (and therefore likely to spend less) world population – YES
    • Adoption of technology – YES
    • Globalization – NO 
    • Abundant labor – NO (More on that to come.)

    Altogether, this means that while we should see inflation returning closer to the Fed’s target 2%, it is unlikely to drop below or even return to that target, unless the target is adjusted to account for these shifts.

    Some may be expecting or hoping for the government to step in to right these conditions, but that seems unlikely to happen here. The Fed is unlikely to raise the cost of capital to bring costs down, given the risk of recession involved in doing so. And any type of fix to ward off recession is also unlikely, Jalics said, as the current government debt-to-GDP ratio is about double what is normal or ideal. 

    How should M&D companies respond? Our takeaway from Jalics’ outlook is that companies should remain patient. Continue to move forward with both caution and optimism, but hold off on making major moves until we see more: the potential impacts of rate hikes, the progression of inflation, and anything else the months ahead may hold.

    Labor and AI

    Amid Jalics’ wide-ranging exploration of current conditions, a standout theme, and one especially relevant to the M&D community, was labor.

    Unemployment is currently at a 50-year low, at 3.7%. While some sectors, such as technology, have seen rampant layoffs, those have been offset by strengths in other areas, such as healthcare and government. On a net basis, over 350,000 jobs (in non-farm sectors) were added in January 2024 alone.

    But, as many M&D employers are well aware, there is a gap between jobs open and workers available – currently about 6.25 million job seekers for 9 million jobs. Those who can work, are working or looking for jobs. The “prime age labor force participation rate” is near 83% – a return to pre-pandemic levels, likely as the extra funds that people stored from COVID-19 stimulus measures are running out. Additionally, as the population continues to shift older and birth rates have fallen, the labor shortage does not look like it will improve naturally. 

    How should M&D companies respond?

    • It will be increasingly important to remain competitive in attracting and retaining workers. Jalics recommends that employers help themselves by:
      • Eliminating unnecessary barriers to employment
      • Providing flexibility for working parents
      • Providing pathways for older workers
      • Establishing non-traditional talent pipelines
    • But, efficiency will also be key. Businesses should be proactively looking for improvements to processes and technology that will allow them to do more with fewer people.

    What will be AI’s role in this shift? While the new technology will help in some ways to make up for a dearth of workers, some fear that it will also destroy jobs. But Jalics pointed out that historically, any time a new technology has been introduced that enhances productivity, it has led to a net add of overall jobs. Some workers will be left behind, primarily in low-skilled positions; but ultimately we should see growth, likely in unexpected sectors. Jalics gave the example of the invention of the car: It was a blow to those who made whips for buggies, but the automotive supply chain added jobs in dozens of verticals.

    In conclusion

    Despite these ups and downs, positives and challenges, Jalics ultimately ended his report on an optimistic note: “It’s been a terrible bet to bet against the resiliency of the American economy.”

    If you look over the past 80 years at cumulative economic expansions, and cumulative economic contractions, you see that “the cumulative economic march forward far, far outweighs the bad times.”

    “So don’t bet against the American capitalist system, American entrepreneurship, American ingenuity, American technological advance,” Jalics said. “Don’t bet against it.”

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    This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.