The overall sense that a recession is coming is lessening. Still, crosscurrents exist within the economy that can be troubling to businesses.
“There’s a close watch on this summer’s consumer spending,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “Will overall spending cool? That will be a predominant indicator to many of whether or not a recession is imminent.”
While recessionary fears cool, labor and inflation concerns rise, even as interest rates seem to stabilize. It’s a mixed bag for business leaders, putting them in a position of uncertainty as they await signals from both consumers and central banks.
Smart Business spoke with Altman about the economic conditions in the U.S. and what they might mean for business leaders this year.
What should business leaders know about inflation today?
Inflation is still a top concern for business leaders. However, the expectation is that inflation for businesses should be coming down as supply-chain pressures lift with the reopening of China and a settling of commodity prices. Inflation, now, is primarily around labor as wages become a significant input cost.
What’s the state of labor in the U.S.?
According to survey data, small businesses’ intent to hire people this year is declining rapidly — only about 5 percent of small businesses are planning on hiring more people this year. It’s not clear whether that’s because they can’t get people or they don’t need people. Small businesses are wrestling with their hiring strategy because while future demand is there, the idea of a recession is giving them pause. That means in order to hire, they must have a lot of conviction. That requires a clear understanding of what they’re looking for, what that person is going to do, and how they’ll positively impact the business.
How are interest rates impacting businesses?
The central banks in emerging markets started raising interest rates two years ago; most of them have stopped. This year, it’s a matter of when will developed markets’ central banks stop. That should lead to a debate because inflation is not down to where a lot of these central banks want it. Still, while the increased rates have affected credit markets, banks and those who operate on a lot of debt, interest rates really haven’t had too big of an impact on the economy because there is so much cash on the sidelines available to deploy.
There’s frustration that the Fed, through a year’s worth of rate increases, they haven’t been able to drive demand down. That’s what’s going to make this summer more interesting. Will central banks continue on a path of trying to slow demand in a supply-constrained world? If they do, something else might break. And while short-term interest rates are still up, longer-term bond yields have come down recently, which should hopefully help the housing market as spring selling season approaches. It’s also a sign from the bond market suggesting the Fed went too far.
Higher interest rates have affected investment, but companies should diversify their business portfolio and continue to invest. That may happen at a higher financing cost, though that’s dependent on each business and how much cash flow they generate, how much cash they have on hand.
What’s happening in public markets?
Public markets started to change late last fall. We know it was a horrible investment year last year. Where investors wanted to be last year for the first 10 months was very short-term, high-quality bonds and stocks that paid consistent high dividends. This year, that’s all flipped. It’s now all about high-yield bonds outperforming; growth stocks are outperforming income stocks, so everything’s rotated back to where it was prior to the Fed starting rate increases.
Looking at the first quarter, nothing that the Fed wanted to happen is working. The economy is not slowing, the labor market is still tight, inflation didn’t slow much and a bank on each coast broke. Does that mean the Fed is going to lash out at the economy and markets in the second and third quarters? We’ll have to wait and see. ●
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