U.S. is heading toward a freight recession?

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The business implications 

Reading recent commentary from influential executives suggests that the expected recession is no longer a theory but a real fear. Moody’s Chief Economist believes that there is an elevated risk of the US falling into recession. This echoes the sentiments expressed by the CEO of Deloitte who recently commented about the fear of stagflation and its impact on the Irish economy. Soaring diesel prices are making life hard for consumers who will also be impacted by inflation. 

Economic woes that threaten economic stability

Analysts are already beginning to speculate about what a recession might look like. Previously impervious countries like Germany have started triggering their contingency plans for a likely recession. The confidence of influential CEOs has fallen to some of its lowest levels since the beginning of the Covid-19 pandemic and now stands in a negative category for the first time during the economic expansion era. The US government has suggested some corrective actions which have increased concern. 

Federal reserve responses are leading to even more concern

When the Federal Reserve made a request to control inflation, business leaders began to think about the inevitable recession. The recent Conference Board indicated that nearly 70% of CEOs expected that the war on inflation that had been suggested by the Fed was likely to trigger a recession. The survey was conducted between the 25th of April and the 9th of May with 133 CEOs participating. Most of the participants in the survey were leading public companies. 

Perhaps there is some good news as only 11% of CEOs expected that they would have to deal with a “hard-landing” which is associated with a deep recession. Instead, most CEOs anticipate a short recession that could be relatively mild. It is also notable that most business leaders are not necessarily preparing for an imminent recession. However, the survey did not specify a start date for the  downturn but rather spoke of potential changes in the next few years. 

Inflation triggers concern about the risk of a recession

Despite some pockets of optimism or even complacency, there was a good deal of pessimism among the CEOs that were surveyed at the Conference Board. These are striking sentiments given the fact that the economic recovery following the Covid-19 pandemic is just over 24 months old. In fact, such pessimism contradicts the significant economic growth in the US that occurred in 2021. Dana Peterson is the Chief Economist for the Conference Board. During an interview with CNN, she suggested that  businesses are being challenged on multiple fronts while CEOs are increasingly wary of an upcoming recession. 

The pessimism among CEOs remains a fact despite that many economic indicators in the USA are still robust. For example, retail sales remain healthy and growing. In fact, the job market has nearly returned to where it was in the pre-Covid 19 era. Besides, businesses continue spending aggressively. All this points to a strong US economy despite CEO fears. 

A tough economic environment is on the horizon

Having a strong economy has not meant that businesses in the US are having an easy time navigating it. For instance, companies must deal with worker shortages due to the lockdown and the transition towards working from home or even moving to other sectors. The price strikes are endemic and hurting ordinary Americans. The political-military crisis in Ukraine has social and economic consequences that are likely to challenge all businesses that are connected to that supply chain. 

There are even larger corporations that are struggling with these realities. For example, the earnings outlook for Walmart (WMT) has dimmed because of issues with the supply chain and skyrocketing inflation. That is one of the reasons why the company’s stock lost 11% on Tuesday. This is the worst one-day decline for Walmart since October 1987. 

Will conditions worsen with time?

The Conference Board survey indicated that 6 out of every 10 CEOs surveyed expected things to get worse. In that respect, Walmart is not unique. 61% of CEOs in the survey reported that economic conditions had worsened over the past half year. This compares badly with the 35% who had reported worsening conditions for the first quarter of this year. Less than 15% of surveyed CEOs reported improvements in economic conditions. 

High inflation has increased fears about a possible recession. Even the Fed is struggling to control inflation through a gradual increase in interest rates. Given the limited response to interest rate changes, the Fed may be forced into more drastic interventions such as slowing the economy. The danger in that option is that the economy might slow down to the extent that post-Covid 19 recovery ends. 

Some recriminations about responses and policies

Ben Bernanke who was the 14th Fed chair between 2006 and 2014 has criticized the current team for a slow response to inflation. These criticisms are echoed by Mike Sommers, CEO of the American Petroleum Institute. In an interview with CNN, Sommers reiterated that recessionary concerns are real and should be treated seriously. He referenced historical data which shows that rapid interest rate hikes like what the Fed is attempting to do often lead to recessions. 

In some ways, the results of the Conference Board shows that these criticisms mirror the general pessimistic mood among CEOs. Many business leaders have reported economic challenges including recruitment and retention of qualified staff. Nevertheless, wage growth is expected to continue rising if the survey results are truly indicative of the macro-economic status quo. However, forecasts for business investment have been downgraded by the CEOs. 

Business responses to challenges

The business community is not passive when it comes to dealing with this threat. Many companies thrive in periods of high inflation by raising prices and hence passing on some of the burden to their consumers. 54% of responses in the Conference Board survey indicated that they were managing input costs by passing them to their customers. There is also concern about the possibility of a self-fulfilling prophecy if this pessimism is realized. 

The strong momentum for growth in 2021 following the Covid-19 pandemic has inspired many economists to remain hopeful about growth rates holding steady. The Conference Board projects a modest growth rate of 2.25% in 2022. Of course, this is down from the 6% of 2021 which once again reflects the overall pessimism of the business class. Goldman Sachs dampened its GDP projections over the week but still maintains a projection of 2.4% growth in 2022 and 1.6% in 2023. 

Skepticism about the pessimism

The Chief Economist for RSM, Joe Brusuelas, has suggested that concerns about a near-term recession are overblown. However, he admits that the power of the Fed to engineer a soft landing for everyone is limited. Accordingly, the Fed is trying to tread a fine line between slowing inflation and not hampering post-Covid 19 recovery or even damaging the real economy.

Nevertheless, the pessimism of the Conference Board should be taken seriously since businesses tend to hunker down if they anticipate a recession. Once they do that, the recession occurs. This is in effect talking oneself into a recession. Once the sentiment is negative, businesses start shedding jobs and consumers become spooked enough which leads to an actual recession. The senior chairman of Goldman Sachs, Lloyd Blankfein, echoed these sentiments by suggesting to CBS over the weekend that the anticipated recession is not a foregone conclusion even if the risk remains. 

Wrapping up

A combination of world crises has meant that the post-Covid 19 recovery that was enjoyed by the US economy in 2021 is now being downgraded for the near future. A survey of leading CEOs at the Conference Board indicated a generally negative sentiment. Yet, there are voices that are cautioning against over-pessimism which might make the anticipated recession a self-fulfilling prophecy.

Victor Nunez

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