Looking Ahead to a Slowdown in 2023

BY STEVE GUGLIELMO AND BRIAN BEAULIEU

Following three tumultuous years marked by outside influences on the business community, 2023 will see a return to a sense of normalcy in 2023. However, with that normalcy comes the prospect of a slowdown in the second half of the year. We had the opportunity to speak with GAWDA’s Chief Economist and President and CEO of ITR Economics Brian Beaulieu about what GAWDA members can expect this year.

Check out the full first quarter forecast on pages 58 for a deeper dive into what the firm expects to see in the economy in early 2023. Also, check out the January 15 th episode of GAWDA TV to see an interview with Brian on his expectations for the year ahead.

We thank Brian for his help and insight in putting this forecast together.

WELDING & GASES TODAY: What is the overall economic outlook for the welding & gases industry in 2023?

BRIAN BEAULIEU: It's really mixed. The federal reserve has put us into an inverse yield curve situation. And that is giving us an 88% probability that in the second half of 2023, we are going to find conditions weakening for our industry. GAWDA members are going to have to battle through that in order to make 2023 the year that they would like it to be. On a dollar basis, it's going to be easier than on a volume basis to call it a flat year, relative to 2022. But it can be done. We know these ladies and gentlemen. They can do it.

WGT: The last three years have had outside influences that have been challenges. First COVID, then inflation and supply chain shortages. Do you see the business environment returning to a semblance of normalcy this year? Or will we still see those outside influences continuing to have an outsize impact on business?

BB: Yes. It will have some degree of normalcy associated with it in that supply chains are becoming more normal. They aren't back to normal, but they are becoming more normal. And I think that's going to continue. We're seeing onshoring going on more and more. Investment into the United States remains very strong. And that is going to help make business conditions get more into a rhythm and feel the way that they used to feel. The labor shortage is going to continue to be a problem. And that's not ever going to feel normal, I don't think. But we control what we can control. And what is normal is treating your people right and having a very strong, positive culture, and doing the best you can.

WGT: ITR produces an incredible amount of information through your website. You also have the quarterly forecast in each issue, including this one on page 88. If you were in an elevator with a GAWDA member and you only had a minute to talk, what is the biggest takeaway you would want them to walk into 2023 with?

BB: The biggest takeaway I would like to impart on people is that with everything going on around us and all the swirling news, just focus on what you can control. We can't control interest rates. We can't control inflation. But we can control how we react to those. If you focus on what you can control, and do that very well, then the rest of it tends to diminish in relative importance. And that is the best way to get through, particularly the second half of 2023.

WGT: Are there any growth markets that have presented themselves specific to GAWDA members?

BB: There are some markets that have been impervious to the whole pandemic. Healthcare, for one. Supermarkets, obviously, for another. But those are going to be returning to normal. I think that some of the members are going to find more mil- itary defense spending opportunities. Congress is giving the Pentagon more than what they asked for. We're going to be building more ships than the Navy has asked for. Those are all opportunities that I think a lot of us were concerned wouldn't be there under the current political environment. But it looks like they will be there over the next five years. So, go look for those opportunities, they're going to be fertile.

WGT: When you look back on the COVID era and this period of history, what do you think the biggest lesson that we will have learned as businesses will be?

BB: You should be asking a philosopher that question. So many of us understand more keenly how important family is over everything else. We may have given that more lip service than heart-felt service before COVID came around.

It has been fascinating to me how many companies have been able to change on the fly. Others insist on clinging to the old ways of doing things. Legal firms that are demanding all their attorneys come into the office. Why? They don't need to be in the office. "Well, how else are we going to build a strong culture?" There are other ways to build a strong culture. Millennials and Gen Z don't want to be in the office, by and large. If you can't accommodate them, then you're excluding yourself from a tremendous realm of talent.

I think we're at a crossroads where there are people who can adapt to this new paradigm and then those who cannot. And one is going to have a very rich talent pool to draw from, especially as we are contending with this labor shortage. And the others are going to be dealing with that labor shortage much more acutely because they can't change. It's going to be fascinating to see how that plays out.

WGT: How about looking back a little bit further. What is your biggest economic takeaway from the end of the Great Recession to this coming depression that you have predicted for the 2030s?

BB: The biggest takeaway is that historians will look back and say, "Whoa. That's when they passed that tipping point. It was in April 2009 when our national debt exceeded 80% of our nominal GDP." 800 years' worth of history tells us that we do not recover from something like that very easily, if at all. In fact, I'm only aware of one country that has ever recovered from that.

We have the luxury of being the world's number one economy and the most favored currency, for now. But the big gamble is, can we figure out how to digitize our currency so that it is competitive when it comes to international settlements and even domestic trade? If we can't figure out how to digitize it, without losing our liberties, we've got a major problem. And that is something to keep an eye on going forward.

WGT: When you say digitize it, do you mean like cryptocurrency?

BB: Not so much cryptocurrency, but the Chinese took 10% of their currency and turned it into electronic money. There is no paper. And when you use one of the digitized yuans in China, they know exactly where you are. They know exactly what you bought, and they know exactly what you paid for it. What American is going to sit still with the government knowing that sort of detail about our day-to-day economic life? So, we'll probably do it on the international scene. It's more about using blockchain effectively. Not bitcoin or other crypto, it's just using the blockchain. But somehow keeping the government's nose out of our business. That will be the trick.

WGT: As a firm that has prided itself on being able to see out past the horizon, what would you say the biggest economic disruptors of the next five to ten years will be? And how can members prepare themselves?

BB: Some of the biggest disruptors are going to be the mounting U.S. national debt and deficit spending as a percent of GDP. Those are big swords that are hanging over our heads. Inflation is going down right now to normal levels, but it's going to be coming back because of that fiscal policy and because of monetary policy and the labor shortage all at the same time.

Another major factor that I think people need to keep an eye on is nationalism. That's new. We lived through globalization in the 80s and 90s and the first part of this century. The pendulum has swung back the other way. There are new ways of seeing this future and attacking this future.

Another huge thing to consider is that what got you here, in terms of your wealth and your portfolio isn't what is going to get you where you want to be over the next 10 years. If you're still playing the game with the rules from ten years ago, you're going to lose. The opportunity cost is going to be tremendous. You have to recognize that this inflation and this government's propensity for spending money it doesn't have changes the rules in a way that we haven't seen since the 70s and the early 1980s, which is ancient history for most people. We don't have to reinvent the playbook, but we better study that old playbook to figure out what works and what doesn't work.

WGT: Are there any common misconceptions or mistakes that you're seeing people make that you would advise them to correct in the coming years?

BB: Not beyond some of the things we've already touched on. Stop believing that government can fix everything. Stop believing that the Federal Reserve is some all-powerful entity. Start looking more inward and driving what you can control and be the best version of yourself, both as a company and as a leader. That's where you're going to make the biggest difference going forward.

WGT: Are there any last thoughts you'd like to leave readers with as we head into the year?

BB: Yes, I have several, as a matter of fact. First, people have tended to look upon the Federal Reserve as if they're omniscient and all-powerful. They're just people trying to do the best that they can do with imperfect tools. So, don't give them too much credit for trying to engineer a soft landing. There's an 88% probability that we're not going to have a soft landing, based on what has already happened. So that is what we should be dealing with.

The other part of it is just turn off the news. There's a reason we invented sports. It gives us something else to follow. The headlines are going to drive you crazy. We offer a lot of free material on our website. Avail yourselves of that to get behind the headlines and look at the data to see what is actually going on. I promise, it's different than what those headlines are telling you.

We have a sustained inversion between the 10-year Treasury yield and the 3-month Treasury yield. The long-term yield (3.49% as of December 14) is running below the short-term yield (4.33%). The chart below illustrates the inversion, as you can see the lighter-colored line rising above the darker-colored line.

The inverse yield curve doesn’t cause a recession per se; however, it is an excellent bellwether of where the economy will be going in the future. This situation signals, with an 88% probability, that the U.S. Total Industrial Production 12MMA will peak in 2023 or the first half of 2024. The causal factor perhaps can be better understood as the Federal Reserve’s action of pushing up short-term interest rates (increasing the federal funds target rate, which directly relates to a higher 3-month yield) higher than the prevailing wisdom of the bond market perceived as necessary. The collective opinion of the bond market seems to be that