CEO confidence in the U.S. economy is waning as survey results and comments from top executives suggest a dim outlook.
According to the business research group’s regular survey, 61 percent of CEOs noted that general economic conditions were worse compared to six months ago, while 37 percent stated that conditions in their own industries were worse.
“CEO confidence weakened further in the second quarter, as executives contended with rising prices and supply chain challenges, which the war in Ukraine and renewed COVID restrictions in China exacerbated,” said Dana M. Peterson, chief economist of the Conference Board, in a statement. “Expectations for future conditions were also bleak, with 60 percent of executives anticipating the economy will worsen over the next six months—a marked rise from the 23 percent who held that view last quarter.”
A recession is defined as two consecutive quarters of negative economic growth, according to the National Bureau of Economic Research. But the Bureau broadened its recession indicators, looking at four other key areas: payroll employment, industrial output, volume of sales in the manufacturing and trade sectors, and inflation-adjusted personal income.
Business leaders have been open about their consternation surrounding the broader economy.
Bob Bilbruck, CEO at Captjur, a technology and development services firm, shared his colleagues’ pessimistic assessment of the economy.
“I think many CEOs like myself know we are in a recession. We also know things are not all roses as the political class would have you believe.”
He also believes that surging gasoline prices, which hit a fresh all-time high of $4.622 per gallon on May 31, will force consumers to stop spending, which is bad news for the broader economy, which is two-thirds consumption.
“I think many CEOs are digging in to ride out the storm and actually see the worsening recession as a good thing,” Bilbruck said. “Money has been too easy too long, it’s had a very negative effect on the real economy. Wall Street has loved it, but all good times come to an end—this time I think it’s going to be a bad one much like 2008.”
“Yes, but this is actually a good thing. It has been raining money on fools for too long. Some bankruptcies need to happen,” he said.
“Companies that are inherently negative cash flow (ie value destroyers) need to die, so that they stop consuming resources.”
“I think it’s going to be hard to avoid some kind of recession,” he told the conference.
“But I also get the fact that everyone is so strong going into this, [which] should hopefully provide a cushion so that whatever recession there is, if there is one, is short and not all that deep.”
“It’s unclear as to whether or not that’s going to happen in the U.S. or not. But it’s certainly something that we’re closely watching,” he said.
But not all of Corporate America’s leaders think the sky is falling.
Overall, Mike Davis, founding partner at Olive Tree Ridge, a multi-strategy asset management firm, argues that the next recession will be different than what transpired in 2008, particularly on the labor front.
“The unemployment rates are all-time low. It’s very difficult to get great talent, retain great talent, and becomes more expensive to do so,” he stated.
Who Will Survive?
Since the pandemic started more than two years ago, investors were ebullient over internet companies, from video conferencing (Zoom) to home entertainment (Netflix).This year, however, it has been an entirely different story. The tech selloff has been brutal, with the Nasdaq Composite Index plummeting 25 percent. Many tech giants have offered lackluster earnings and provided weak guidance.
In this type of environment, companies need to “actually plan for the worst,” Davis said.
“I do think that we don’t even know where the bottom is yet, but a lot of people are trying to play the timing game,” he said. “I don’t think that’s the right move at all. Things are going to get worse.”
Until companies’ indicators prove otherwise on a consistent basis, it will be critical for private enterprises to prepare, likening the situation to the classic “Ant and the Grasshopper” fable.
“Cash is the almighty,” he said.
Indeed, businesses with healthy margins and produce physical things are back with a vengeance. The FTSE 100 Index and S&P/TSX Composite Index, benchmarks with a focus on commodities and industry, have slipped 1.5 percent and 2 percent, respectively.
Peter Oppenheimer, chief global equity strategist and head of Macro Research in Europe at Goldman Sachs, calls this the “postmodern cycle.”
“We are seeing it quite quickly,” Oppenheimer wrote in a note. “It’s a reminder that we’re still living in a very human, physical world. The value of those physical things, including human capital, is actually going up.”
If companies can routinely deliver high-quality products rather than inform customers that they are out of stock or the quality of goods has slipped, customers will appreciate it, even if costs rise, Davis noted.
Financial experts agree: If the fundamentals are phenomenal, businesses will be able to withstand the next economic downturn.
