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Business spending, especially on capital equipment, will be on a slowing trend. Business optimism picked up in the second quarter, leading to fewer inventory cuts, moderate spending on equipment, and a surge in car and truck purchases as availability improved. But despite the economy’s resilience, it appears to be losing steam gradually, and businesses will likely pull back a bit on their spending. Also, bank lending has tightened in response to the troubles in the banking sector and to the uncertain economic outlook, and interest rates on loans to business borrowers are still high.
Labor costs will continue to rise at a faster-than-usual pace this year. Annual wage growth should ease from 4.4% now to about 3.5% at the end of the year, as the economic slowdown reduces hiring, but wage gains won’t slow their “normal” 3% pace until the end of 2024. Wage growth will be highest in sectors with continuing labor shortages — such as health care — and in the Southern states and Texas, where large in-migration has increased demand for many 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 source, even if it’s in China, or bring sourcing closer to home to reduce geopolitical risks? A number of firms are reshoring to the United States, but even more have looked to Mexico as a close but still cheap alternative to China.
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 the 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 now in abundant supply. 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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