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Businesses expect strong sales this year — but higher prices for almost everything

"Wage inflation is becoming a real problem for companies that employ a lot of people,” said one analyst.
Pedestrians carry shopping bags on Powell Street in San Francisco on Dec. 30, 2021.
With China and other large goods-producing countries still implementing zero-Covid policies, the entire supply chain is affected — resulting in higher prices for consumers. David Paul Morris / Bloomberg via Getty Images file

A new survey found that fourth-quarter business activity was robust — but that executives are growing increasingly nervous about shortages in the supplies of both labor and components that are driving costs higher. 

The January 2022 Business Conditions Survey by the National Association for Business Economics, or NABE, found that nearly two-thirds of respondents — 65 percent — said their sales rose in the final quarter of 2021, but economists said ongoing cost and supply challenges could erode the potential upside.  

“I do think we’re experiencing a perfect storm right now,” said Ross Mayfield, an investment strategy analyst at Baird. “We’re hampered by rising prices and cost inflation, in particular — not just materials but labor. There continues to be a labor shortage, and wage inflation is becoming a real problem for companies that employ a lot of people.”

Tendayi Kapfidze, the chief economist at U.S. Bank, said: “We have twin supply-chain problems ... and as a result, that’s driving up prices. Solving those two supply chain problems is key for the outlook for inflation.”

As labor force participation continues to lag and the so-called Great Resignation reshuffles the U.S. workforce, NABE said labor force challenges have become more acute over the past year. 

“The positive results and outlook come despite clearly visible shortages, particularly labor shortages,” the survey chair, Jan Hogrefe, the chief economist at Boeing Commercial Airplanes, said in the survey report. 

A majority of respondents, 57 percent, said they are contending with shortages of skilled labor, and 24 percent said they face unskilled labor shortages. The share of respondents expecting labor shortages to abate this year declined, and almost one-third of respondents expect shortages of workers to continue into 2023 or beyond. 

“Pre-omicron, we thought we’d be in a much better place” in terms of labor supply, said Scott Ladner, the chief investment officer at Horizon Investments. 

Craig Fehr, a principal and the leader of investment strategy at Edward Jones, said, “This is showing up in faster wage growth.” The percentage of respondents who said wages rose last quarter jumped by 10 points, to 68 percent. An even larger share — 77 percent — expect wage costs to rise in the current quarter.  

“The natural result is going to be an upward movement in wages. Broadly, that’s positive for the economy,” Fehr said, in that it increases consumer confidence, as well as nominal spending power. “The flip side of that is wages tend to be the largest expense item for many companies. This means as wage pressures go up, it puts pressure on profit margins.” 

It also means higher prices: A little over half of companies in the NABE survey expect to raise prices in the next three months, including a whopping 83 percent of goods-producing companies. 

More than half of surveyed companies expect to raise prices in the next three months.

NABE found a very high level of uncertainty around the supply-chain chaos that has weighed on business output for the past several months. Three in 10 survey respondents said they didn’t know when to expect delays, shortages and higher prices to abate. Another 37 percent expect bottlenecks to persist at least through the second half of this year.

And the pandemic remains a worrisome wild card. Over one-third of respondents — 36 percent — indicate that the rising number of Covid cases is the biggest downside risk to their companies’ outlooks, up by 8 percentage points from last quarter. 

“The virus is still the dominant factor in the economy,” Kapfidze said. “We’ve had several of these episodes since the pandemic began, where you think you have some clarity around things getting better and then you get a curveball from the virus and it kind of resets everything.”

The highly contagious omicron variant of the coronavirus, although it is peaking in some parts of the U.S., is still wreaking havoc on already stretched supply chains.

“A lot of the large goods-producing nations, China in particular, ... are still pursuing a zero-Covid policy,” Mayfield said. “That obviously throws the entire supply chain, particularly for goods.”

If U.S. companies begin to believe they can’t rely on just-in-time inventory management for inputs and finished projects from places like China, they could more aggressively pursue reshoring or shifting to domestic suppliers. While that would suggest that consumers in the near term would face higher prices as companies strain to meet demand, the long-term ramifications could be economically beneficial, Mayfield said. 

“To the extent you reshore supply chains ... it’s good for the economy, writ large, because you’re talking about creating jobs,” he said. 

NABE respondents indicated that their companies are investing more and expect to continue doing so at least for the near term. Half of respondents — and more than three-quarters of those in goods-producing sectors — reported higher capital spending on equipment and technology in the final quarter of 2021. More than 4 in 10 — and two-thirds of goods producers — expect higher spending this quarter. 

In the short term, that is likely to mean a squeeze on profits, said Aoifinn Devitt, the chief investment officer at Moneta. “I do see that this is going to translate into more pressure on margins for companies,” she said. “I suspect that we’re normalizing higher inflation.”

But higher capital spending, especially on technology or equipment that improves productivity, can also deliver returns by making companies more efficient and flexible — a potentially huge advantage in a historically tight jobs market — and ultimately contribute to more sustained economic expansion.

“One interesting thing is there was a big jump in capital spending expectations,” Kapfidze said, adding that some of it is because labor shortages are making companies “think about how do we do things more efficiently.”

“That’s a good thing for long-term economic growth,” he said.