By Jimmy Fernandez
Undoubtedly, the winter season can be the economy’s biggest weakness. The world’s top business leaders now warn the 2022/23 winter season will likely trigger an economic downturn. Similarly, a new survey from MagnifyMoney reveals 70% of Americans believe a recession is on its way. We are already witnessing several major corporations reversing their outlook and laying down elaborate strategies to cut spending and revamp their liquidity in preparation for a possible winter recession.
Five signs pointing to a likely recession this winter
The following are some of the factors pointing toward the likelihood of a recession in the upcoming winter months:
Reduced consumer spending
The main driver of the US economy is domestic shopping. Consumers are pulling back on their spending with the ever-rising cost of goods and services and stunted income growth. Experts reveal the challenges caused by inflation are forcing consumers to dip into their savings.
Studies reveal personal savings rates as of October 2022 were at a paltry 2.5%, a 17-year low amid relentless inflation. Experts attribute the current pullback in savings to rising interest rates which have pushed mortgage rates to historic highs. Consumers are struggling with high borrowing rates and high prices, impacting the purchase of necessities such as food and housing.
Corporates are revising their outlook
During the pandemic, Americans opened their wallets, allowing the corporate world to enjoy the booming business activity. Even with historically high inflation, businesses easily pass on their higher costs to consumers, thereby cushioning their profit margins. But that era is well behind us now. Companies are increasingly warning of reduced earnings in the coming months.
Recently FedEx, with a presence in over 200 countries, revised its outlook while revealing possible depressed earnings of more than 40%. FedEx’s case isn’t isolated. Apple, too, is facing a similar predicament, with its stock falling following the news the company was suspending plans for iPhone 14 production due to slowing demand.
Depressed holiday hiring
Typically, many employers would ramp up hiring ahead of the holiday season. However, this year we saw a more cautious mood. The usual September uptick in companies posting temporary jobs was missing. Economic experts reveal many employers are on a wait-and-see basis before seeking temporary help.
The specific conditions likely to determine job openings are the state of the economy and consumer spending. With rising food prices and the Fed hiking interest rates at an alarming pace, companies have valid concerns regarding the performance of the holiday shopping season.
Falling stock prices
Wall Street has witnessed stunted business growth, with stocks heading for their worst year since 2008. Compared to 2021, when equity markets thrived, 2022 has seen reduced activity thanks to rising interest rates. In the spring of 2020, the Federal Reserve unleashed a potent monetary-easing policy to keep the financial markets steady. However, in early 2022, the Fed unwound its buying mechanism to slow inflation.
This single act has been brutal for many companies, with the S&P 500 seeing a massive 24% reduction for the year. Currently, all other major US indexes are well in the bear markets, down at least 20% from the 2021 highs. Interestingly the bond markets, which are usually a safe haven for investors during tumultuous times when stocks decline, are also in the bear market.
How are corporations preparing for likely recession?
Many companies are currently laying down strategies to keep their spending in line. We are seeing leaders focusing on their balance sheets and reducing budgets for non-essential spending. Some are also looking for ways to spin off unprofitable business lines. With the recession looming, companies are bracing themselves for increased shareholder activism, pushing them to further clean up their balance sheets. Experts say we are likely to see enhanced M&A activity in 2023.
Are concerns over inflation likely to deflate consumer spending this holiday season?
High inflation and rising prices are already impacting consumer behavior over the holiday season. So far, holiday shopping has been intense, but promotions are aggressive. It seems that consumers are looking for deep discounts this year and are getting them. Investors are expecting to see the effect of these margin-crunching sales in the next round of earnings.
What is the likely impact of depressed economic growth on jobs?
We should see a slowing in the jobs market starting this holiday season and into the better part of the New Year. Companies will continue to focus on profitable growth versus cost growth. Smaller margins on sales will likely drive cuts across companies’ fixed costs, with the biggest target being salaries and wages. A desire for companies to maintain liquidity amidst dwindling revenue and increased shareholder demand for value will likely force a cut in hiring.
What to expect
The recession is definitely on the horizon following theholiday season as corporations and investors prepare for a significant slowdown throughout the winter. If you are a business or corporation, now is the best time to prepare your company for the economic downtown in the face of a harsh business environment.
Jimmy Fernandez is a Senior Analyst of Ownership Intelligence at D.F. King & Co., an Equiniti Company.
About D.F. King
At D.F. King, an Equiniti company, we leverage our unique depth and diversity of experience to deliver high-level advisory services, custom reporting, security holder outreach programs and educational strategies to each client. D.F. King provides high-level advisory services in contested solicitations and proactive solutions for all corporate governance needs. Services include proxy solicitation; shareholder profile analysis; proxy advisory firm consulting; M&A / information agent services to equity and debt markets; corporate governance and executive compensation consulting; and call center services.
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