Guest Column: Interest rates, energy costs, uncertainty all on the rise

It is easy to state that recent geopolitical events are now at the top of my list of risks to the outlook for the U.S. economy and the plastics industry. But it is exceedingly difficult to assess this risk and then come up with reasonable probabilities for potential outcomes.

Try as I will, I cannot fully wrap my head around all of the possible risks that arise when a megalomaniac in charge of the world's largest nuclear arsenal goes rogue. I am not alone in my confusion, and I know that widespread confusion is part of Russian leader Vladimir Putin's strategy. Nevertheless, that does not make it any easier to forecast. For the time being, I am in day-to-day mode.

So let's keep it simple and make sure we have a firm grasp on the things we do know. Conditions can and will change quickly, but there are some things about which I am pretty certain—as of today. These are my core issues.

The U.S. economy has been hit recently by two significant supply shocks: the global pandemic and the crisis in Ukraine. Prior to Russia's invasion, the rate of inflation in the U.S. was already at levels we have not seen in decades. After the attack on Ukraine, prices for commodities such as oil, industrial metals and grains spiked.

The specter of a war in Europe notwithstanding, the spike in energy prices exacerbated consumers' rising worries about inflation. Before the invasion and despite the strongest job market the nation has enjoyed in years, U.S. consumer sentiment was trending lower. The latest reading for the University of Michigan's Consumer Sentiment Index represented a 10-year low. Fortunately, there has not yet been much evidence to suggest that consumers were starting to pull back on their spending patterns. But a persistent trend of lower consumer sentiment cannot be ignored indefinitely by either business leaders or politicians because burgeoning negative attitudes might just turn into action.

In an effort to stem the rising tide of inflation, the Federal Reserve Board will start to raise interest rates this month. This will be the first increase in the Fed Funds Rate since 2018, and it will mark the beginning of the end of the most accommodative period of Fed support ever.

It was always going to be a delicate mission for the Fed to increase interest rates just enough to cool inflation but not raise them so much that it resulted in a recession in the U.S. economy. The difficulty of that mission has now been ratcheted up substantially. Due to the restrictions on trade and the tightening of global supply chains, there is widespread consensus that the Russian attack on Ukraine is likely to impede GDP growth in the U.S. and at the same time increase inflationary pressures.

That about sums up the bad news, and there is more than enough to cause concern. But there are bright spots, and some mitigating nuances, which bear mentioning.

We all know that rising energy prices are an unwelcome tax on consumers, and this is especially true for lower-income households. We also know that persistently higher oil prices correspond to rising resin prices, and this represents a threat to profit margins for processors. But there are a few other things to keep in mind about the energy markets.

When adjusted for inflation, the recent spike in energy prices is not really quite as high as one might assume from just a quick glance at a historical chart. In fact, the real impact of a surge in the price of oil has been much higher in the past than it is right now. Part of this is due to inflation, but mostly it is because gasoline and heating fuels account for a much smaller share of household expenses than they have in the past. By some calculations, the share of consumer wallets that goes to gasoline is down by 50 percent when compared with the 2008 spike in oil prices. And one more positive fact: The U.S. is energy independent. This was not always the case in my lifetime, but it is now, and rising oil prices actually benefit the U.S. energy sector.

To be sure, many American households will feel the pinch from higher energy costs, but most households will not change their patterns of consumption. As I mentioned, the labor market is robust and wages are rising. Not only that, but there is still an abundance of excess savings in the system.

Overall, the balance sheets for both households and businesses are relatively healthy, and demand for bank loans remains strong. The Fed will raise interest rates in the coming months, perhaps by as much as 2-3 percent. But for the foreseeable future, real interest rates will remain negative.

In a healthy, well-functioning economy, the pace of growth in real GDP should be approximately equal to the inflation-adjusted yield on a 10-year Treasury Note. We still have a long way to go before we get back to this level of economic health, and until we do, I can only describe the interest rate environment as accommodative. Therefore, I believe it is quite possible that these conditions will allow the U.S. economy to ride out the current spate of price shocks and continue to expand, albeit at a somewhat slower pace than we would have had if Russia had not invaded Ukraine.

So as of this writing, I am not forecasting a recession in the coming year. Interest rates will rise, the stock market will be volatile, and the price of many commodities may continue to swing wildly. But all of this will be mitigated if the current trend of rising real wages persists. Thus far, I have not yet seen enough reliable signals in the intermediate- to long-term data to indicate that a recession is imminent. But I do think the rate of growth will decelerate, which is not necessarily a bad thing if we are trying to wrestle the rate of inflation lower.

Obviously, this could change. But regardless of whether my outlook is right or wrong, my heart goes out to the freedom-loving citizens of Ukraine. As Thomas Jefferson wrote in the Declaration of Independence, "Governments ... derive their just powers from the consent of the governed." That is a forecast I will buy into long after Putin is dead and buried.