Clouds gathering, turbulence growing for 2023

“The labor market’s going to be tight for years to come,” says Bill Conerly, principal of his own consulting firm in Lake Oswego, Oregon. “The decade from 2020 to 2030 is expected to have the lowest growth of working-age population since the Civil War. One reason is the retirement of the Baby Boomers. Another is the low rate of immigration over the last few years.”

Palisin agrees that a labor shortage is going to be a long-term condition. He says his members are making moves to lessen the effect. 

“Employers are trying to be creative in the way they keep and retain workers, not only by offering higher salary rates but also by extending benefits and encouraging work flexibility,” Palisin says. “They are also investing more in automation for labor-intensive tasks.”

Retail slowdown

If high employment levels can stress the bottom lines of employers, they can also fill workers’ pockets with spendable cash. And flush consumers can help drive a robust retail sector, which is an important slice of the economic pie. 

“Wage rates, as measured by the Employment Cost Index, remain very high by the standards of the last couple of decades,” says Scott Hoyt, senior director of consumer economics at Moody’s Analytics.

Even so, activity is decelerating at the nation’s stores. 

“2023 is likely to be a challenging year for retail, with growth only at 2.8 percent,” Hoyt says. 

The projected growth is well below the sector’s historic 4.3 percent average, as well as the 8.3 percent increase expected when 2022 numbers are finally tallied. The recent trend is well below 2021, when a 17.5 percent increase was fueled by a consumer shift away from services and toward goods.

A slowing economy is contributing to retail’s deceleration, as is a penchant for post-pandemic consumers to shell out less cash on merchandise and more on services such as hotels, travel and restaurants. Any softening of inflation from recent highs should also depress results because retail activity is measured in nominal terms.

Supply chain disruptions

Higher wages and scarce workers are not the only forces depressing business profits. Another major factor is a rise in interest rates – the Fed’s favorite tool to fight inflation. 

“The purpose of increasing interest rates is to drive down demand,” Palisin says. “So, our members are expecting to see a decrease in new orders that will impact the overall economy. Many of our companies have lines of credit that rely on floating interest rates. Rising rates will take a hit to the bottom line as companies decide whether to utilize those lines to support their cash flow and investments.”

Adding further downward pressure are disruptions in the delivery of goods that continue to plague companies large and small. 

“Supply chain problems have improved over the past year, but there hasn’t been the significant resolution we had hoped for,” Palisin says. “Random shortages in materials and deliveries are still plaguing our members, and that’s leading to backlogging of orders – companies just can’t get the materials or parts.”

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