Top U.S. corporate executives are sharply divided on the country’s chances of escaping a recession as mixed signals in interest rates, labor markets and consumer spending cloud the business outlook for 2023.
Midway through the fourth-quarter earnings season, investors hoping for a clear signal about the outlook for the U.S. economy from its biggest companies were left frustrated.
Companies such as Ford, McDonald’s, UPS and US Bancorp have told investors they are preparing for at least a mild recession in the United States. Elon Musk, Tesla’s chief executive, went further, telling analysts last week that the automaker was likely facing “a pretty tough recession.”
Yet even as Big Tech groups such as Alphabet cut costs in the face of a slowdown in advertising, other companies, including American Express and General Motors, have assured analysts that they expect United States avoids any serious slowdown.
Caterpillar, the industrial machinery group seen as an economic indicator, said this week that its U.S. market “remains relatively strong to date.”
“So far, it’s safe to say that the recession is mostly on people’s minds,” said Danny Bachman, US economic forecaster at Deloitte. “Sentiment data has been very negative even though real economic activity – measured by job gains, industrial production and retail sales – [is] still indicating growth,” he noted, predicting very slow growth but no recession in the first half of this year.
The split-screen image of the world’s largest economy comes as the Federal Reserve slowed the pace of its recent interest rate hikes this week while indicating it would have to raise borrowing costs further to rein in inflation.
Evidence of slowing growth is mounting, with an ISM report this week showing manufacturing activity contracted for a third month in January. The IMF now expects US growth to rise from 2% last year to 1.4% in 2023.
Leaders across a slew of industries have been more cautious about macro conditions in recent months, with a Business Roundtable survey last month revealing that CEO confidence had fallen below its long-term average for the first time since the third quarter of 2023.
The number of “recession” mentions on earnings calls by CEOs has surpassed levels at the start of the pandemic in November, according to data provider AlphaSense/Sentieo.
Since the start of the year, job losses have also spread from Silicon Valley to Wall Street. Challenger Gray & Christmas, an outplacement and executive coaching firm, estimated that US employers announced more than 100,000 job cuts in January, compared with less than 44,000 in December and 19,000 a year earlier.
This week, PayPal blamed a “difficult macroeconomic environment” as it announced 2,000 layoffs, FedEx said it would cut 10% of its top executives to better align with customer demand, and Intel cited “headwinds macroeconomics” to explain why it was cutting the compensation of its CEO and other executives and managers.
Such announcements, however, follow a series of stronger than expected hirings. A Labor Department report this week found the country had 11 million job vacancies at the end of 2022, up from 10.46 million in November. US employers defied forecasts by adding 517,000 jobs in January, nearly double December’s figure.
“Pandemic paranoia has set in with employers remembering how difficult it was to get workers back. So it makes sense that despite what we see in the headlines about the layoffs, they are still well below historical norms,” said Becky Frankiewicz, president of ManpowerGroup, the staffing firm.
That strong labor market would continue to support consumer spending in 2023, Mastercard chief financial officer Sachin Mehra said last week.
McDonald’s and Mondelez International echoed its description of the American consumer as “resilient”, with the burger chain joining Procter & Gamble in saying it saw little evidence its customers were choosing cheaper options. Instead of such a drop, Starbucks said its customers spent a record average amount per visit in December.
Other companies, however, reinforced the message of consumer sentiment surveys that show Americans are becoming more cautious about discretionary spending, especially on goods rather than services such as travel and restaurants.
While Morgan Stanley economists highlighted how “belt-tightening” consumers are depleting the excess savings they accumulated at the start of the pandemic, clothing company Hanesbrands described demand as “muted.”
“In total spending, it’s remarkable stability,” Vasant Prabhu, Visa’s chief financial officer, told analysts last week: “What’s happening is spending on goods has slowed down a bit, Service spending has really taken over… Consumers have just changed their spending, but they’re spending the same amount.”
A more bearish message emerged from companies exposed to a housing market slowed by rising mortgage rates. Sherwin-Williams, one of America’s largest paint companies, said last week it saw “a very challenging demand environment.”
With little visibility beyond the first six months of the year, CEO John Morikis said, “our base case in 2023 remains to prepare for the worst.”