With inflation showing signs of easing, the Federal Reserve also seems less determined to raise unemployment. Add it all up, and it could be corporate executives who need to chill out a bit. Instead of all the noise we heard during earnings season about preparing for a recession, perhaps executives should prepare to respond to a stronger-than-expected growth environment. That would be better for their businesses and keep the economy from repeating itself with the overstretched supply chains and understocked inventories they knew not too long ago.
After JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon issued his infamous warning of an “economic hurricane” last year, a New Year’s survey found executives still worried about slow growth and a 2023 recession, with a lukewarm economy lasting into mid-2024. In an interview with CNN this week, Bank of America Corp. CEO Brian Moynihan maintained. his view that the US will experience a “mild recession” this year, and worried about the US government defaulting if Congress cannot agree. to raise the borrowing ceiling. “We have to be prepared for that, not only in this country, but also in other countries around the world.”
I’m sympathetic to executives who don’t want to get overly optimistic at this stage. It is still easy to find reasons to be negative if one is inclined to do so. As late as mid-December, the Federal Reserve predicted that the unemployment rate would rise to 4.6% by the end of 2023, providing a warning anchor for companies like banks. The ISM Manufacturing Index, a well-tracked barometer of sentiment among factory owners, just registered its third straight month of contraction.
That’s why it’s fair for many companies to say, “I haven’t seen the surge in my own company’s data yet, and the economists and forecasters we pay to inform our outlook are telling us to prepare for a mild recession this year.”
But overall, rising labor incomes are boosting demand, and income growth in January appears to be historically strong. That is probably one of the reasons why we have already seen improvements in the auto and housing sectors. And that’s going to spread throughout the economy.
I wrote about how several inflation adjustments in January would provide a one-time boost to household incomes, and the strong jobs report will add to that impact. Aggregate weekly payrolls – a measure that combines jobs, hours worked and wages – increased in January by more than any month in 2021 or 2022. It likely means that when the personal income report comes out at the end of the month, it will show that the household income grew at the fastest pace in more than a decade, apart from a few pandemic-hit months.
Even the aforementioned ISM manufacturing index contained some nuance suggesting improvement going forward. Commentary in the report indicated that new order rates were low because of disagreements between buyer and supplier over price levels and delivery times, and that these issues should be resolved by the second quarter.
The situation homebuilders are facing might be a good way to think about this: they hope to get their suppliers to cut costs before starting a new building cycle in a few months.
If business leaders need more of an excuse to throw out some of their 2023 negativity, I’ll give them two main reasons. First, the consensus forecasts for the US economy this year already look outdated. When the Federal Reserve made its 4.6% unemployment forecast, the rate stood at 3.6%. Two months later, it has fallen to 3.4% – in the opposite direction, with no indication that it will rise.
The concern people had leading up to last week’s Federal Reserve meeting was that Board Chairman Jerome Powell would push back some of the optimism the financial markets had shown. But he chose not to and the markets responded by rising even more. This easing of financial conditions – rising stock prices, tightening credit spreads – makes the kind of gloomy economic outlook people have been worrying about in 2023 less likely.
The second reason companies need to prepare for a better economy is that if they don’t, we risk repeating some of the supply chain mishaps we’ve experienced over the past few years. Retailers and wholesalers are focused on reducing inventory and making sure they don’t have excess capacity in case the economy goes into recession. When demand turns out to be stronger than expected, they could become undersupplied again. That would mean another round of deficits and inflation at a time when we hoped to put those problems behind us.
What we know for sure is that the job market remains strong, January was a great month for car sales, the housing market appears to be on the mend and the Federal Reserve is currently showing no interest in going against the easing of financial conditions. that has happened in markets as investors become more optimistic. Business leaders remain pessimistic at their peril.
More from Bloomberg’s opinion:
• Whatever Keynes said, let’s take his advice: John Authers
• If the Fed is suspected of bluffing, it has a problem: Clive Crook
• When the markets are this hot, should you participate?: Mohamed El-Erian
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.
More stories like this are available at bloomberg.com/opinion