Businesses ‘Extremely Cautious’ Heading Into 2023: Goldman Sachs CEO

A woman passes by signs advertising sales of Black Friday in the Manhattan borough of New York City, N.Y., on Nov. 26, 2021. Jeenah Moon/Reuters

The question of whether the U.S. economy is in recession remains one of the most hotly debated topics of 2022, yet corporate America is bracing for a slump in consumer spending. As high inflation depresses consumer demand, businesses of all sizes expect the economy to worsen in 2023.

Consumer spending has kept the U.S. economy afloat over the past year, but it’s unclear whether this pace of spending will be sustained in the coming year as household budgets become further stressed.

Bank deposits have fallen by $340 billion since their peak in April, indicating a weakening savings buffer. The personal savings rate as a share of disposable income fell to a 17-year low of 2.3 percent in October. And consumers are increasingly turning to credit cards to make ends meet in the face of rising prices.

With household budgets squeezed and Americans signaling future spending cuts, business leaders are worried about a dip in revenues and the need to lay off personnel.

The profit outlook for S&P 500 companies also reflects the economic weakness ahead. Analysts now expect fourth-quarter earnings to fall by 2.8 percent, according to FactSet. This would be the first drop since the third quarter of 2020, when the COVID-19 pandemic was at its peak. In the past five years, the average profit growth of S&P 500 companies was 14.3 percent.

“If a recession is coming in 2023, it will be the most widely anticipated recession of all time,” Ed Yardeni, president of Yardeni Research, said, noting that some of the most vocal pessimists are bankers. “It would be the first time that we’ve collectively talked ourselves into a recession.”

Executives of the largest U.S. banks are warning that rising prices would dampen consumer spending, which makes up roughly 70 percent of the U.S. gross domestic product.

“Economic growth is slowing,” Goldman Sachs CEO David Solomon said on Dec. 6 at a conference hosted by the investment bank. “When I talk to our clients, they sound extremely cautious.”

Goldman Sachs is reportedly planning to lay off thousands of staff, as it prepares for an unpredictable economic environment in the new year. It will be the latest big bank to cut jobs due to a sluggish economy and Wall Street activity.

Many executives, including the CEOs of JPMorgan, GM, Walmart, United, and Union Pacific, are also preparing for a slowdown in consumer spending and business activity. Among the challenges they mention are rising interest rates, inflation, geopolitical tensions, and stressed supply chains.

“It could be a hurricane. We simply don’t know,” JPMorgan Chase CEO Jamie Dimon told CNBC.

Main Street is also expecting choppy waters in 2023, particularly owing to high inflation and tightening credit conditions.

Nearly 40 percent of small business owners believe the U.S. economy will enter a recession in 2023, up from 26 percent in the third quarter, according to the latest CNBC–SurveyMonkey survey. Most respondents anticipate the recession to begin in the first half of next year.

Traders work on the floor at the New York Stock Exchange as the Federal Reserve chairman Jerome Powell speaks after announcing a rate increase on Nov. 2, 2022. Seth Wenig/AP Photo

Following its final policy meeting of the year on Dec. 14, the Federal Reserve put financial markets on notice that officials were nearly unanimous in their assessment that interest rates needed to rise further and remain at high levels for longer to fight inflation.

Former Treasury Secretary Larry Summers believes that the Fed is making the right call this time to focus on lowering inflation despite increasing concerns about an economic recession.

According to Summers, one of the problems is that salaries are still catching up with inflation and labor markets remain extraordinarily tight.

There’s no reason to believe that inflation is under control “until wage inflation declines significantly or we get clear evidence of a productivity acceleration,” Summers wrote in a recent Washington Post op-ed.

“Unfortunately, all major reductions in inflation in the past 70 years have been associated with recessions. It should come as no surprise that many economists, including me, expect a recession to begin in 2023.”