Whether you’re on the left or right, trust in mainstream news has declined precipitously in recent years, not only because of media bias, but also because much of what existing outlets proclaim will happen ends up being at best, misleading, and at worst, completely wrong. In fact, several well-known prognosticators have predicted that the next Presidential election will, in large part, be determined by podcasts and social media due to the dissolution of trust in traditional news sources.
However, when it comes to business topics—especially those involving the US economy and manufacturing—information consumers do not have the same alarm bells built in when consuming news. Nor do many seek out (despite the existence of dozens of great sources) expert analysis that offers conflicting opinions on economics.
We believe this means that those in manufacturing who only read and listen to existing business media outlets could very well find themselves on the wrong side of a forecast or strategy. In short, the herd is coalescing around expectations in cases where the data does not necessarily support the narrative.
Let’s explore three economic expectations, which are common themes today, that are just as likely to prove false as accurate.
First, there is a market expectation that the Federal Reserve will hit the pause button on raising interest rates and will shift to the inverse—lowering them. However, some of the economic data we are looking at in our own forecasts suggest that this may be faulty logic. Core inflation, which does not include highly volatile parts of the economy, including food and energy, still rose month-over-month in April by 0.4% to 5.5%—compared with an overall inflation rate of 4.9%.
In short, core (i.e., sticky) inflation may not be over, and the Fed will have to continue to fight it if this is the case. If not by lowering rates, then by maintaining current levels, which is enough to put the economy into not-so-immediate-soft landing territory than we would otherwise forecast with an expected rate reduction, outside of other monetary or policy interventions.
Second, to this point, there are expectations in the market that we will be in for a soft landing in 2023—in other words a shallow and short-lived recession. This may well prove accurate. Both of us (in separate speeches recently) have said as much. But 2024/2025 could prove us wrong, and we could be in for a much deeper and more sustained hard landing in this time horizon, which could cause prolonged damage to the manufacturing economy and jobs market.
The elephant in the room in this case (at least the one with the longest trunk) is the commercial real estate market. Countless commercial mortgages are coming due (for refinancing) starting next year for office spaces that have cratered in value, with vacancy rates now standing at 22.4% in Chicago, for example. In NYC, JLL notes that “office vacancy in the first three months of 2023 rose 16.1%, which means some 76 million square feet of office space is empty.”
As refinancing begins to occur on greatly reduced property valuations, bankruptcies could mount and cascade across the broader economy as this asset, an investment bubble, is popped. We can already see this happening in the early stages of slow motion if we look hard enough. And if what looks like the inevitable happens, a very challenging hard landing in 2024/2025, factoring in other debt markets, is just as likely to happen than not.
Finally, there is an expectation built into the economy that there will be a manufacturing and commodity supercycle in the years to come from a massive “e-mobility” market boom. In other words, there is a drive towards the modernization of the electrical grid, a switch to electric vehicles, new electronics, and so on.
However, government subsidies flowing into this market largely occurred in 2022 (with more to come in 2024), which could dramatically impact the financial performance of nascent businesses that often carry substantial debt loads. This could drive many businesses into restructuring and bankruptcy, unless the most optimistic adoption predictions are met.
Similar to the situation with commercial real estate, if revolving facilities and commercial debt end up becoming due without growth expectations being met, manufacturers and producers will be unable to meet their obligations, and commodity markets for copper and other “e” metals could go the opposite way that many are predicting. And if this occurs, we could very well see not only a commercial mortgage crunch but also a manufacturing economic crunch and commodity trough, leading to a longer and deeper recession than the one experienced in 2008.
To be prepared for uncertainty, manufacturing business leaders must take it upon themselves to actively seek out arguments and ideas that contradict the prevailing narrative — just as the herd is already doing when it comes to consuming general news.
