A recent survey of CEOs suggests that most expect a US recession but that it will be “short and shallow.” Because of this, many are not waiting to be fired and some are still hiring. It points to the continuation of the current tight labor market, even if the economy cools in response to the Federal Reserve’s interest rate hikes and the ongoing banking crisis.
CEOs continue to send the same message about the US economy: A recession is coming but the continued strength of the labor market will endure. Often, corporate executives will focus on cutting costs and jobs amid uncertain times, but they expect the job market to remain competitive. The seeming cognitive dissonance underlies the complexity of an economy that has suffered a series of shocks in recent years – from the pandemic to inflation to rapidly rising interest rates to a mini banking crisis – but nevertheless continues to show signs of stability.
CEO confidence scale published by Conference Boardwhere I am the chief economist, revealed that for the fourth consecutive quarter the world’s top executives increasingly expect a US recession in the next 12 to 18 months. But they expect it to be short and shallow, with limited global spillover. An outsized 87% of CEOs envision this scenario, according to the second quarter iteration of the survey, while only 6% expect a deep recession with global spillover, and 7% only expect no recession. The general pessimism of CEOs continues to evaluate the general scale of confidence, which at 43 is better than the lows reached during the worst of the pandemic. (The Conference Board Measure of CEO Confidence is a quarterly survey of nearly 150 CEOs conducted in partnership with The Business Council. Respondents are members of The Business Council and a reading below 50 indicates more negative than positive attitudes survey response.)
In previous quarterly surveys, CEOs indicated that they expect the Fed’s anti-inflationary efforts to drive this short and mild downturn in the US economy. CEOs continue to say they support the central bank’s aggressive rate hikes this quarter, even amid clear expectations of a recession and an ongoing banking crisis. In fact, 82% of CEOs think inflation should be the driving force behind the Fed’s monetary policy decisions. CEOs ranked other influences on Fed policy as less important, including a tight labor market (49%), banking stress and the potential for a credit crunch (43%), growth in GDP (28%), and debt limit uncertainty (1 %). Given that average consumer inflation gauges are hovering above the Fed’s 2% target and the risk of high inflation expectations is embedded, this view makes sense.
CEOs appear to be taking it easy on the ongoing banking crisis, and most don’t see it as likely to cause a major recession, or even help cause one. Asked in the survey about different responses to the crisis, only 28% of CEOs said they increased the liquidity of their own company, and only 17% changed bank relationships. Most CEOs “check relationships” as opposed to taking steps to protect themselves from the rest of the fallout from the crisis: 62% of CEOs check relationships with their banks, 28% check their own management at risk, 33% check the liquidity adequacy of their customers, and 30% check their suppliers’ liquidity adequacy.
Despite the bleak outlook for the US economy, CEOs continue to believe the labor market will defy expectations and remain afloat. Three sets of survey responses support this conclusion: First, only 20% of CEOs intend to reduce their workforce in the next 12 months. A staggering 33% expect to continue hiring and a whopping 46% expect no personnel changes. Second, 75% of CEOs plan to increase wages by 3 percentage points or more in the next year and another 20% plan to increase wages by 1-3 percentage points during the same period. Meanwhile, in total only 5% expect no changes in wages (4%) or aim to cut wages (1%). Third, and finally, only 9% of CEOs expect no difficulty in hiring qualified workers, meaning 91% expect some or a lot of difficulty.
Job shortages are the key difference between the current outlook compared to previous recessions. Moreover, labor shortages are such that CEOs expect the recession to be “short and shallow.” Disappearing workers, strict immigration policies, and, more critically, an aging workforce, are creating a severe labor supply shortage even as demand is likely to decline in some industries. over the course of the year. While workers aged 25 to 64 have largely returned to the labor market after the pandemic, those 65 and older are quickly exiting, creating a shortage of employees with skills and experience.
This backdrop makes the CEOs’ responses relatively easy to interpret, with CEOs falling into one of three camps. In the first camp, a significant portion of CEOs are still hiring workers to fill roles vacated by retiring Baby Boomers. Those positions are especially prevalent in industries that require personal labor, including health care, child and elder care, hotels, restaurants, and travel.
In the second is the fifth part of the companies that signaled the removal. This is probably one of the pandemic lovers that excelled during the health crisis while the demand for goods, technology, finance, and housing. They have been forced to right-size amid higher interest rates and as consumers shift their demand to services. These less fortunate areas include a broad swath of the technology, finance, real estate, construction, and transportation and warehousing sectors.
Most CEOs fall into the third camp and expect no changes in their workforce, because they expect a short and shallow recession, and prefer to keep workers instead of letting go. workers and rehire them again at what is likely to be a higher cost.
This CEO behavior underscores the difficulty companies face in maintaining a skilled workforce even while staring at the brains of another recession. While they face less difficulty than a year ago, most companies still expect at least some difficulty in hiring talented workers. Furthermore, to attract and retain talent, chief executives continue to see throwing money at the problem (in the form of higher wages and benefits) as the primary solution to this long-term issue. As increasing wages and benefits forever become unsustainable, many companies are turning to automation and digital transformation to fill the gap created by constrained labor supply.
So, are CEOs’ sentiments about the recession and the workforce justified?
Yes. Consumers also fear a recession in the next six months but continue to give the labor market relatively high marks according to The Conference Board Consumer Confidence Survey. In addition, The Conference Board US Leading Economic Index Marking the US recession that has now started for more than a year, however the Current Economic Index remains strong due to strong labor market components. Even the financial market’s pricing for the Fed’s rate cuts to begin this year, despite stubborn inflation, suggests that investors are anticipating a recession. However, that projected slowdown is small, pointing to a short and shallow recession facilitated by persistent underemployment related to labor market underemployment.
