Corporate America is divided on odds of US recession

Corporate America’s top executives are sharply divided on the chances of the country escaping a recession, as conflicting signals on interest rates, labour markets and consumer spending muddle the business outlook for 2023.

Halfway through the fourth-quarter earnings season, investors hoping for a clear signal on the US economy’s prospects from its largest businesses have been frustrated.

Companies including Ford, McDonald’s, UPS and US Bancorp have told investors that they are preparing for at least a mild US recession. Elon Musk, Tesla’s chief executive, went further, telling analysts last week that the carmaker probably faced “a pretty difficult recession”. 

Yet even as Big Tech groups such as Alphabet cut costs in the face of an advertising slowdown, other companies including American Express and General Motors have assured analysts that they expect the US to avoid any serious downturn.

Caterpillar, the industrial machinery group that is considered an economic bellwether, said this week that its US market “remains relatively strong to date”. 

“So far, it’s safe to say that the recession is mostly in people’s minds,” said Danny Bachman, a US economic forecaster at Deloitte. “Sentiment data has been very negative even as actual economic activity — as 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 picture of the world’s largest economy comes as the Federal Reserve this week slowed the pace of its recent interest rate increases while indicating that it would still have to raise borrowing costs further to tame inflation.

Evidence of slowing growth is mounting, with an ISM report this week showing that manufacturing activity contracted for a third month in January. The IMF now projects that US growth will fall from 2 per cent last year to 1.4 per cent in 2023.

Executives across a swath of industries have been expressing more caution about macroeconomic conditions for several months, with a Business Roundtable survey finding last month that CEO confidence had fallen below its long-term average for the first time since the third quarter of 2023.

The number of mentions of “recession” on earnings calls by CEOs topped early-pandemic levels 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, up from less than 44,000 in December and 19,000 a year earlier.

This week PayPal blamed a “challenging macroeconomic environment” in announcing 2,000 lay-offs, FedEx said it would cut 10 per cent of its senior ranks to align better with customer demand, and Intel cited “macroeconomic headwinds” to explain why it was cutting the pay of its CEO and other executives and managers.

Such announcements follow a run of stronger-than-expected hiring, however. A labour department report this week found that the country had 11mn vacancies at the end of 2022, up from 10.46mn 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 who remember how hard it was to bring back workers. So, it makes sense that despite what we are seeing in headlines regarding lay-offs, they are still well below historical norms,” said Becky Frankiewicz, president of ManpowerGroup, the recruitment company.

That strong labour market would continue to underpin consumer spending in 2023, Sachin Mehra, Mastercard’s chief financial officer, said last week.

McDonald’s and Mondelez International echoed his description of the US consumer as “resilient”, with the burger chain joining Procter & Gamble in saying that it was seeing little evidence of its customers choosing cheaper options. Instead of such trading down, Starbucks said its customers spent a record average sum per visit in December.

Other companies, however, have reinforced the message from consumer sentiment surveys which show Americans becoming more cautious about discretionary spending, particularly on goods rather than services such as travel and eating out.

As Morgan Stanley economists pointed to how “belt-tightening” consumers are depleting the excess savings they accumulated early in the pandemic, apparel company Hanesbrands described demand as “muted”.

“In total spend, it’s remarkable stability,” Vasant Prabhu, Visa’s CFO, told analysts last week: “What’s happening is as goods spending slowed down a bit, services spending really took up all the slack . . . Consumers have just shifted their spending but they’re spending the same amount.” 

A more bearish message has emerged from companies exposed to a housing market that is being slowed by rising mortgage rates. Sherwin-Williams, one of the largest US paint companies, said last week that it saw “a very challenging demand environment”.

With little visibility beyond the first six months of the year, said CEO John Morikis, “our base case in 2023 remains to prepare for the worst”.