Wilmington Trust released its 2022 capital markets forecast, “Economic Arrhythmia: Businesses Adapt to Resource Disorder,” which also includes the company’s latest business owners success survey. The forecast identifies several key economic risks heading into the new year, including labor and supply chain disruptions, but forecasts that these risks will normalize, inflation will decelerate and smart technology investments will provide long-term value for businesses.

The 2022 forecast reports that the evolution of labor markets, supply chain inventories and inflation will largely define the shape of the global economy and the performance of financial markets in 2022 and 2023. Pervasive trends influencing this include:

• Labor shortages: Wilmington Trust expects this to normalize but sees risks associated with early retirements, new skill requirements and greater demand for flexibility.
• Supply chain disruptions: Companies appear primed to ramp up production as long as they are able to access resources to help refill inventories.
• Inflation: Wilmington Trust expects inflation to dip in 2022 as long as there is a decrease in wage pressures and supply chain disruptions.
• Technology: According to Wilmington Trust, there is long-term value in savvy technology investments in the cloud and the supply chain for business owners.

“The COVID-19 pandemic has been the most jarring event in a generation and will have permanent impacts on our daily lives. But the further we get from the initial shock, the clearer it becomes that the abrupt nature of the recession and resulting policy response has severed the typical bonds within the economy,” Tony Roth, chief investment officer at Wilmington Trust, said. “Much like an electrical impulse to the heart, trillions of dollars of stimulus provided support to sustain the consumer and business sectors of the economy through the eye of the storm. But, as we look forward to life after the pandemic, we see that the depth of change that the public health crisis has brought to key pockets of the economy has resulted in an ‘economic arrhythmia.’”

A Unique Cycle

Multiple factors have aligned to create a phenomenon that Wilmington Trust calls a “global resource disorder,” caused by the labor and supply chain disruptions that have heightened inflation and constricted economic activity. In fact, current inflation is at levels unseen this early in a usual economic recovery, instead reflecting what would typically be seen deep in the deceleration phase of the economic cycle, according to Wilmington Trust.

Meanwhile, a historical labor market shortage — more than any other economic factor — is accounting for a massive breakdown in the normally well-oiled global supply chain. In previous cycles, the labor market has usually lagged the overall recovery by more than a year.

With job openings at record highs and large corporations raising minimum (and other) wages substantially, the labor markets are in a unique position at this nascent point in the economic recovery. While Wilmington Trust expects the environment to normalize in 2022 — with companies ready to ramp up production — several factors still present risks:

• Baby boomers are leaving the workforce quicker than expected, due in part to the performance of 401(k) and other investments. Their decision to stay out has created a vacuum where mid-level employees are moved up or hired away by competitors.
• One of the effects of this economic crisis has been more spending on technology, which has led to a need for workers with specific technology skill sets. However, many workers are not prepared to master new technologies and have found themselves less suited for new jobs until they can get the necessary training.
• There has been some stagnation in the usual places where economies boom in a recovery and change in the way people want to work (i.e., remote work, higher wages).

Wilmington Trust’s base case is that inflation pressures will likely subside toward the middle of 2022, with workers rejoining the labor force, supply chains running more smoothly and the Federal Reserve beginning a gradual rate-hike cycle near the end of the year.

Adaptive Businesses

Wilmington Trust’s capital markets forecast further highlights that some of the best-positioned companies heading into next year are those using technology investments as a foundation for stronger, more resilient businesses. Companies able to pivot in the face of new challenges and elevate profit margins to be faster and more resilient while still making needed tech investments have proven to be the leaders during the pandemic, according to Wilmington Trust. At this stage in past economic cycles, technology spending would decline, but in the current situation, technology spending has gone up.

Successful businesses are using, and will increasingly use, technology to increase productivity in three main ways:

• Providing Better Tools: Technology arms employees with productivity-enhancing tools focused on communication, collaboration and automation, contributing to higher employee retention.
• Attracting New Workers: Companies are trying to attract talent by raising wages, adding sign-on or referral bonuses and enhancing benefits. However, they are also embracing remote and flexible work arrangements, and many are instituting a nationalized pay scale, which is a benefit to those moving away from big cities.
• Automation: Companies are accelerating their use of artificial intelligence, big data and 5G. Automation tools such as robotics and AI will dramatically impact workforces in industries such as quick-serve food, retail and warehousing. Cloud providers should continue to experience robust revenue growth.

Because of these technology upgrades, many sectors of the economy have largely continued business as usual, with workers logging on from home and saving billions of dollars normally spent on things like business travel, entertainment and conference sponsorships.

Furthermore, persistently low interest rates have made it easier and more attractive for businesses to borrow money to accomplish needed technology upgrades. Companies have been able to issue debt and refinance older, higher-interest debt, giving them more flexibility with current revenue.

Wilmington Trust is optimistic about corporate profitability and the equity market broadly. Within factors and sectors, Wilmington Trust advocates for exposure to the value factor and cyclical sectors, as valuations remain attractive and should continue to benefit from higher rates and above-trend economic growth. However, the integration of technology into business and consumer activity will continue to accelerate, requiring continued exposure to the growth factor and technology-related sectors over the next three to five years.

2022 Business Owners Success Survey

Wilmington Trust’s 2022 business owners success survey found business owner confidence in the U.S. economy and their own businesses is almost back to pre-pandemic levels, with 77% saying they are very optimistic about their businesses’ prospects, approaching the 81% who answered the same just before the pandemic.

Additionally, 67% said they expect a year-over-year increase in 2022 revenue, leading them to make investments in both technology and people. More than half (54%) of respondents are investing in technology to enable operations to run more smoothly.

This optimistic outlook on the economy also appears to be leading large businesses to plan for increased capital spending, with more than half (54%) of large business owners saying they would do so in the next six months. However, this optimism has not extended to small business owners, with only 31% of these owners planning to increase their capital spending.

Among all business owners surveyed who increased their capital spending, more than than two-thirds (68%) invested in technology so their operations could run more efficiently, and two-thirds also invested in technology for remote work.

However, business owners also acknowledged that they are facing many challenges as they adapt to new business conditions. They identified supply chain issues (45%) and labor costs (44%) as the largest potential obstacles to revenue growth while noting that hiring and retraining employees has been a priority and a challenge. While 62% of respondents found it difficult to fill open positions, 83% were still able to make hires for open positions. To fill open roles, business owners had to provide more benefits (45%), pay higher wages (44%) and offer flexible work hours (43%).