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Chasing the Black Swan: Economic Predictions in Uncertain Times (Part 1)

Economist Kuehl looks into the current state of business

ATLANTA — The black swan.

Yes, it is a bird, but when discussing the economy, a black swan is an unpredictable or unforeseen event that has extreme, usually negative, consequences.

“This was a concept that was created by an economist about 25 years ago to explain why we were wrong,” says Chris Kuehl, Ph.D., managing partner and co-founder of Armada Corporate Intelligence, which provides services in corporate intelligence gathering, economic forecasting and strategy development.

“These are things that we knew were going to happen, but we didn’t know when and we didn’t know how. We didn’t know what the actual outcome was going to be. They throw all of the predictions off.”

The past two-and-a-half years have been littered with black swan events, such as the Ukraine invasion. Before that was everything that took place because of the pandemic.

“We know that almost everything we did in 2020 was wrong and most all of it backfired,” Kuehl says. “And as a result, we’re dealing with some of the fallout from that set of decisions, just like we’re dealing with some of the fallout that we’re seeing now.”

So, what can laundry owners and operators expect from the economy in the coming year? Kuehl examined several factors to cautiously look ahead during the general session, “Now What? Expectations for 2022 and Beyond,” at the recent Clean Show in Atlanta.

CURRENT STATE OF BUSINESS (PART 1)

The week Kuehl spoke to a standing-room-only house at Clean, major economic news came out: the decline of gross domestic product (GDP) and the federal government raising interest rates.

And the question of whether or not the economy is heading into a recession.

“One of the things I try to caution people is to not pay a whole lot of attention to the media because frequently the information is somewhat incomplete,” Kuehl shares.

“For example, the whole conversation about two consecutive quarters of negative growth equals a recession, it doesn’t—it is one of the things that the National Bureau of Economic Research (NBER) looks at when they’re trying to decide if there is a recession.

“First off, they can’t do it until after you’ve been in it for half a year, so they are looking backward. So, they won’t tell us if there’s been a recession until sometime toward the end of this year.

“But when they look at the things that create recession, (the GDP) is one of 26 variables that they look at. So, there are 25 other things that they’re looking at.”

Kuehl says there are current factors that contradict the assessment that the economy is in a recession, such as employment.

“Generally, when you’re heading into a recession, people start laying people off,” he points out. “The unemployment rate is still historically low. It’s around 3.2% nationally, and that’s not consistent with an imminent recession.”

Current interest rates offer the same counterargument to recession, Kuehl says.

“Interest rates have gone up, and they’ve gone up twice in a row at the rate of three-quarters of a point, but they are still 2.25, which is certainly a lot higher, but the last 10 years has been the anomaly,” he says.

“Prior to that, this would have been considered low interest rates if you go back to 2007, 2008, and certainly the decade before that. The rates were 3.5 or 4.5, 5%. It’s still half what they were, not that it isn’t having an impact.”

When it comes to the drop in GDP, Kuehl says much of that has to do with exports. Exports fell dramatically, and they make up about 15-20% of the national GDP.

“Why did exports go down? The dollar is incredibly strong. It is as strong as it has been in decades,” he shares. “It’s at parity with the euro. It hasn’t been at parity with the euro since the year the euro was invented. So, we’re at a situation now where if you’re trying to sell overseas, it’s tough.

“The dollar is very strong, on the other hand, if you’re importing. Everything coming from the rest of the world is now suddenly cheaper. So, yes, exports are down. Is it because the demand is necessarily down? No, it’s just that it became more expensive.”

Consumer confidence numbers are down, but Kuehl doesn’t like the consumer confidence survey.

He points out that little things, including the day of the week, can influence consumer confidence.

Kuehl looks at what is called the purchasing managers’ index (PMI), which is based on what those managers are buying.

“It is just what it is,” he says. “They’re either buying more, buying less or buying the same. If the numbers are over 50, it indicates expansion. If the numbers are under 50, it indicates contraction.

“The very latest PMI is 52.3. It’s down from what it was, it was 53.6, but it’s still positive. So, you’re looking at numbers that are still suggesting that there’s growth capacity.”

Kuehl also says that utilization and industrial production numbers are up.

“Not that they’re up to the point of people partying in the street,” he says, “and they’re down from what they may have been last year, but 2021 was an anomaly. That was a year in which we grew at 6%. And that goes back to the mistakes made in 2020.”

He points out that reactions to the pandemic were, for the most part, made as if it would be short-term, but it wasn’t. The money placed into the economy ended up being saved because consumers had nowhere to spend it because of shutdowns.

“The beginning of ’21, we thought we had a vaccine,” says Kuehl. “Then came Delta and then came Omicron, and we slow down again. But we ended up blowing through $5 trillion in excess savings in the first six months of 2021. So that goosed the economy.

“And so, as we went into this year, we almost naturally have to come down from that excess activity last year. So, black swans in abundance.”

Check back Thursday for the conclusion!

Chasing the Black Swan: Economic Predictions in Uncertain Times

Chris Kuehl, Ph.D., managing partner and co-founder of Armada Corporate Intelligence, shares about economic expectations during The Clean Show in Atlanta. (Photo: Matt Poe)

Have a question or comment? E-mail our editor Bruce Beggs at [email protected] .