By William (Bill) Fetterman
Written for Forefront magazine April 2018
The drivers of higher inflation appear to be gathering momentum and largely in place as we enter the second quarter of 2018.
The U.S. economy continues its slow but steady expansion, which started in June 2009 and, as of this writing, is the third-longest stretch (currently 103 months) of economic growth in American history. After April 2018 this recovery will be the second-longest ever. Some economists are predicting, and some early data trends are supporting, that as the expansion continues GDP growth will accelerate in 2018 above 2.5%, thanks largely to stimulus from recent tax legislation. Consumer spending, which makes up roughly 70% of the U.S. economy, also continues to be strong and is showing signs of accelerating. A recent survey of 52 economists by Wolters Kluwer Blue Chip Economic Indicators showed an expectation that consumer spending would rise 2.5% in 2018, and that survey was taken before the recent tax legislation was passed.[1] Business investment expectations were also strong in this survey, with business investment growth expected to be 4.7% for 2018 but could be as high as 6.0%. These expectations, when coupled with the U.S. facing virtually full employment, factory utilization at 77% heading toward inflationary-pressure levels of 80-85%, and potential for protectionist tariffs in the steel and aluminum industries, show that the drivers for an inflationary period are largely in place.
The low unemployment rate and the shortage of skilled labor will place pressure on wage rates, which is often one of the main contributing factors to inflationary cycles. Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch, was recently quoted on this topic.
“We have to think that we are near the boundary of the nonaccelerating inflation rate of employment,” she stated.[2]
Similarly, David Kelly, chief global strategist for JP Morgan Funds, stated, “It’s going to be an interesting year for economists. We have never tried massive fiscal stimulus in a period of full employment.”[3]
Inflation risks are seemingly easy to ignore since periods of high inflation are unfamiliar territory for many Americans – it has been more than a generation since the U.S. has experienced dangerous levels of price increases. The U.S. Bureau of Labor Statistics (BLS) collects and publishes the leading data on inflation. BLS’s Consumer Price Index (CPI), which discounts energy and food costs from its monthly CPI calculation because of their volatility, has shown annual levels of inflation since the 2009 recovery ranging from 0.6% to 2.3% – hardly concerning. One has to go back to 1990 to see inflation above the very palpable 5.0% level, and 1980-81 to see levels above 10%. Today’s factors, however, seem to point to an inflationary period in the not too distant future. Business owners and managers should plan now to counter the effects of inflation on their cost structures and long term value of their businesses.
William (Bill) Fetterman
CPIM, CQE, CMA, leads the operational and engineering practice of Advanced Manufacturing Group, LLC. Bill and the AMG team specialize in working with under-performing operating companies and also healthy companies that are seeking operational excellence as a competitive advantage.
[1] Wolters Kluwer Blue Chip Economic Indicators, as summarized in USA Today on-line edition, Jan. 1, 2018.
[2] Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch, as quoted in Investment News online edition, Jan. 2018.
[3] David Kelly, chief global strategist for JP Morgan Funds, as quoted in Investment News online edition, Jan. 2018.
[1] Wolters Kluwer Blue Chip Economic Indicators, as summarized in USA Today on-line edition, Jan. 1, 2018.
[1] Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch, as quoted in Investment News online edition, Jan. 2018.
[1] David Kelly, chief global strategist for JP Morgan Funds, as quoted in Investment News online edition, Jan. 2018.