A recession is very likely in the coming months, according to Curtis Dubay, chief economist in the Economic Policy Division at the US Chamber of Commerce. Dubay spoke to attendees at International Dairy Foods Association’s (IDFA) Dairy Forum in Orlando on Jan. 25 about what lies ahead for the US economy and how businesses can prepare.
“We are likely to have a recession in the coming months,” Dubay said. “But the US economy is resilient, even in the face of terrible conditions, as it has shown ever since the financial crisis in 2007. The nature of the economy is to grow and grow strongly ... that hasn’t changed.”
The annual inflation rate for the US is 6.5% for the 12 months ended December 2022, after rising 7.1% previously, according to US Labor Department data published Jan. 12. Dubay said the Federal Reserve will likely continue to keep interest rates higher to tame inflation through 2024, noting that a turnaround is not likely until 2025. Regardless, the Fed won’t lower interest rates until the inflation rate is about 2%, he said.
Dubay also said that high food and gas prices put Americans in a bad mood, but until recently people have been continuing to spend at a level above inflation because of a buildup of $3 trillion in excess savings during the pandemic. But now they are going through those savings and are starting to increase their debt on credit cards, “though not at a concerning level.”
During the COVID-19 pandemic, more than $803 billion in stimulus payments were sent directly to Americans during both the Trump and Bidem administrations. In total, nearly $5 trillion went to households, businesses, local governments and other institutions.
According to a recent study by the St. Louis Fed, the government stimulus was responsible for some of the inflation in the US. The authors found that 2.6% of the 7.9% 12-month inflation rate in February 2022 was due to stimulus packages.
More than half of Americans reported using their stimulus money to pay for basic necessities such as food and rent, while recipients with higher incomes tended to save it.
Consumer spending soared in 2021 due to greater disposable income. The authors found that stimulus payments led to a much higher demand for goods going into 2022, but industrial production at the time was unable to keep up. The result was excess inflation.
Retail food and beverage price increases are beginning to slow, according to data from IRI.
While prices in September were 13% higher than the same time last year, they did not grow significantly from July to September. The market research firm said the flattening price curve is a noticeable deviation from the consistent increases between January 2022 and July.
Dairy prices, however, remain higher than other categories.
“General food prices were up 13% last year, but food inflation is now down to 12%,” Dubay said. “But dairy prices are up 16%. Be prepared to be referred to as Big Dairy,” he told Dairy Forum attendees.
Consumers are bargain hunting, shifting to larger pack sizes and steering clear of highly inflated categories to avoid large grocery bills. The change in behaviors resulted in decreased sales volumes for inflated categories like canned/bottled fruit, frozen dinners and shelf-stable dinners, each of which declined more than 10% in September.
“September data revealed some welcome news for consumers: price inflation is slowing down for the first time this year in the perimeter categories that account for nearly $200 billion in annual retail sales,” said Krishnakumar Davey, president of thought leadership for IRI. “However, overall grocery bills are still significantly higher than this time last year, causing shoppers to shift their purchase habits.”
Quick trips to the store also have become more popular, up 5.7% in the last 12 weeks compared with the same time last year, indicating that consumers are choosing to purchase products across different stores to get the best deals.
The supply chain challenges over the past year have improved, but have not yet returned to pre-pandemic normalcy.
The Council of Supply Chain Management Professionals said in its most recent Supply Chain Quarterly that freight volumes for sea, air and trucks are expected to decrease in 2023, and freight rates for all three “are on track to drop from their pandemic high points.”
But a survey of supply chain managers conducted by CNBC in mid-December found more than half do not expect supply chains to return to normal until 2024 or after. Another 29% predicted recovery either in or after 2025 or never. The greatest challenges cited in the survey included raw material availability, port congestion, a lack of skilled workers and reduced warehouse space because of rising inventories.
Transportation woes continue, as well. The truck driver shortage eased slightly in 2022, after the majority of carriers raised pay in 2021, but the industry still faces its second-largest number of vacancies on record, according to American Trucking Associations Chief Economist Bob Costello. The improvement is expected to be temporary, given that an aging workforce and freight demand are both projected to grow in the coming year.
The threat of a labor strike on US railroads was seemingly resolved in December after Congress approved and President Biden signed a bill prohibiting rail workers from commencing a nationwide work stoppage. But commodity trade analysts and industry leaders were still concerned about economic impacts from diminished rail performance while some believed a strike was still possible despite legal ramifications.
The railroad industry also faces a short supply of workers, a pandemic holdover after many rail employees were furloughed during nationwide shut down periods. Railroad companies were unable to rehire a significant number of furloughed employees and have been short-staffed ever since.
Despite the labor shortages, US freight companies recently have posted record profits fueled by exponential demand. As a way to manage demand, railroads began issuing embargoes that place restrictions on the amount of cargo railroads are able to transport. Companies traditionally have imposed embargoes during times of unforeseen disasters, but they also have imposed them as a way to manage congestion on the rail during times of labor shortages. This year alone, data compiled by JPMorgan said railroads have issued nearly 1,500 embargoes, compared with 945 embargoes in 2021 and 641 in 2020.
More than two-thirds of food and beverage industry executives surveyed by Marcum LLP have a positive outlook for the year ahead.
The accounting and advisory services firm asked executives at food manufacturers, restaurants, distributors, retailers and agriculture producers about a variety of issues integral to the health of the industry. It found 69% of respondents have a positive outlook on the industry over the next year, compared with 20% who have a neutral outlook and 16% who have a negative outlook.
Nearly 70% of respondents said revenues were up in 2022 compared with 2021, including 48% who said revenues were up 10% or more.
Approximately 70% of executives expect revenues to grow in the next 12 months. Twenty-one percent of respondents said they expect to see revenues stay the same in 2023 and 10% said they expect to see revenues decline.
“There is much optimism regarding the future of food and beverage companies,” said Louis Biscotti, national leader of Marcum’s food and beverage group. “This was a bit surprising ... considering the many challenges facing the industry.”
Nearly 70% of food and beverage executives cited inflation, rising commodities and other costs as a top challenge for 2022 and 2023.
When asked how their companies plan to address inflation in the year ahead, 62% of food and beverage executives said they plan to reduce costs and 57% said they plan to raise prices. Of those surveyed, 35% said they are renegotiating with suppliers to address inflation. Roughly the same amount said they are changing their approach to inventory, avoiding the purchase of excess products or raw materials.
Managing supply chain relationships also is top of mind for food and beverage executives. Forty percent of respondents cited it as a top challenge for 2022 and 2023. They singled out a range of ways that supply chain issues are impacting their businesses, including shipping delays (66%), cost control (56%), production delays (49%), finding new suppliers (47%) and raw material sourcing (40%). More than a quarter of respondents said supply chain diversification, including onshoring, is a top business strategy for the year ahead.
“With the peak of the pandemic behind us, food and beverage executives are eyeing the future,” Biscotti said. “It’s a watershed moment for the industry with companies and customer habits changing, sourcing becoming more flexible, data becoming a driver of efficiency, M&A going strong and efforts to innovate and boost margins as competition sharpens.”