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Business spending, especially on capital equipment, will be on a slowing trend this year. The broader economy appears to be losing steam. Plus, bank lending has tightened in response to the troubles in the banking sector and to the uncertain economic outlook, and interest rates are still high.
Labor costs will continue to rise at a faster-than-usual pace this year. Annual wage growth should ease from 4.5% now to about 3.5% as the economic slowdown reduces hiring, but will stay above the normal 3% rate. Wage gains will be highest in areas with continuing labor shortages, such as in health care, and in the Southern states and Texas, where large in-migration has increased demand for services.
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Supply chains are working again, and the costs of ocean freight and truck transportation have dropped. But many companies that source overseas are facing a dilemma: go back to the lowest-cost sources, even if they are in China, or bring sourcing closer to home to avoid geopolitical risk? A number of firms are reshoring to the U.S., but even more have looked to Mexico.
Prices of materials have eased in anticipation of slowing world economic growth. Steel and aluminum prices have been coming down. Copper is off its highs, but it won’t fall much because of lower supply from Chile, a major copper exporter. Commodity prices in general had been expected to rise after China abolished its COVID-19 restrictions and its economy rebounded, but the slowing in Western economies is reducing demand for China’s exports.
Some qualified good news for electric vehicle battery makers: The prices of lithium and cobalt — two raw materials needed for EV batteries — have dropped rapidly this year, but that’s because battery production has outpaced demand.
Demand for semiconductors has tanked in the consumer electronics sector, so these types of chips are in abundant supply now. But the availability of automotive and other specialty chips is still limited. Ramping up production takes time, as factories take years to build. Another problem: Like most complex industrial machinery, chipmaking equipment requires chips, too. In short, expect limited supply for much of this year in the areas where shortages still exist. But if a recession hits, the remaining shortages would likely ease.
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