Every year, the non-profit research firm The Conference Board conducts a “C-Suite Outlook” survey. In it, they ask 1,000+ business leaders what is “keeping them up at night, including risks, opportunities, and strategies for growth.”
Top of mind for CEOs in 2023: economic recession, inflation, and labor shortages.
Some readers may already notice a contradiction within these CEO concerns. Company executives are worried about an economic recession, but also about not having enough workers? Economic downturns tend to produce too many unemployed workers, not too few.1
I’ll touch on the labor issue later in the column. First, the key finding from the survey I want to highlight is the anticipation of a recession. A staggering 98% of global CEOs who participated said they think there will be a recession in 2023, but also that it will be short and shallow. Outside of China – where business leaders expect growth throughout the year – C-suite executives said they expect economic growth to return in late 2023 or early 2024.
These findings should not come as a surprise to market watchers and regular readers of my column. The potential for a recession has been widely discussed for months now, to the point where this may be the most anticipated recession in modern history. And that could be a good thing – ironically, the broad expectation of a downturn could help, not hurt, the economy and markets.
This view is based on two factors. The first is that CEOs and other business leaders have plenty of time to make adjustments and prepare their businesses for a weak patch. We’ve already seen this process taking place, particularly in the technology sector, which arguably grew too quickly and hired too many workers during the post-Covid growth surge. Readers are likely familiar with high-profile layoffs announced at Alphabet (Google), Amazon, Microsoft, and others, which contributed to 32,000 lost technology jobs in January.
Outside of the tech sector, however, CEOs are embracing a different approach than they’ve taken in past recessions. Normally, CEOs rely on hiring freezes and layoffs as a primary mechanism for cutting costs, as they have in tech. But other sectors and industries are largely moving in the opposite direction, as evidenced by the strong January payroll numbers (where the U.S. economy added 517,000 new jobs).
The Conference Board survey offers additional insight as to why non-tech CEOs are thinking differently this time around. Business leaders said that instead of laying off workers – which are in short supply – they are focused on retaining talent and using business model innovation and ‘digital transformations’ to grow revenue while keeping costs down. CEOs also think they can preserve profit margins with pricing strategies while cutting administrative costs and discretionary spending (like employee perks and business travel).
Taken together, these actions show that CEOs are preemptively taking steps to remove the excesses and froth that recessions normally force them to confront – which I think is a strong sign that any recession would indeed be a mild one. In business as in life, preparation results in better outcomes.
For markets, the broad anticipation of a recession means two things, in my view. The first is that the actual onset of a recession will have close to no surprise power, which is what tends to move markets. One could even argue that 2022’s market downturn was anticipating the economic weakness to come, meaning a recession is already baked into stock prices. The second is that widespread fear of a recession contributes to a “wall of worry,” which long-time readers know I see as a tailwind for stock prices, not an impediment.
Bottom Line for Investors
It’s important for investors to remember that widely discussed, broadly held views do not tend to be the factors that help or hurt stock prices. The more accepted a view becomes, the less pricing power it has, in my view.
When it comes to the possibility of a recession in the U.S., a final consideration is that the pandemic and even the Great Recession continue to loom large in investors’ minds. This tendency gives way to recency bias – or the expectation that a recession in 2023 will be of a magnitude similar to past recessions. But not all recessions turn out to be major recessions, and some are so mild that many don’t even notice them. That’s what I’m expecting in 2023.
Disclosure
1 Wall Street Journal. January 12, 2023. https://www.wsj.com/articles/ceos-say-they-expect-a-u-s-recession-but-most-think-it-will-be-short-11673500868?mod=business_minor_pos3
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