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Recession Fears Accelerate Following CEOs' Warnings

Stavros Tousios | Wednesday 07 December 2022

Several CEOs of major corporations gave interviews yesterday and generally coalesced on factors warning of recession going into the new year. Banks, in particular, reported worries about slowing consumer demand, although there were some dissenting voices. The comments came alongside reports that more prominent companies in the US were looking to lay off staff, including a 2% headcount cut from Morgan Stanley (MS) and Buzzfeed cutting up to 12% of its staff, citing an economic downturn.

Recession Fears Accelerate Following CEOs' Warnings

CEOs at Centrestage of Recession Rhetoric

One of the CEOs who got a lot of attention with his comments was JPMorgan Chase’s (JPM), CEO, Jamie Dimon, who repeated his warning about inflation potentially tipping the US into a recession next year. Dimon has been warning of an economic "hurricane" since the summer, and has directed his bank to put aside provisions for that eventuality. He tempered his comments, however, saying that the banking system is "unbelievably sound", suggesting that the main difficulty going ahead was Fed policy.

Dimon pointed to a potential change in consumer behaviour reflected in JPMorgan customers' buying habits. Consumers and companies are still in good shape but are running down excess savings accumulated during the pandemic. Spending is up 10% compared to the prior year, with inflation eroding people's savings. He sees those savings running out by the middle of next year. 

Dimon's comments dovetailed with another CEO’s, that of the largest consumer retailer in the US: Walmart (WMT). Its CEO Doug McMillon noted that inflation makes consumers more budget conscious. He said that spending remains strong, but specific categories are seeing a drawback in spendings, such as electronics and toys. Essential items are expected to remain in demand, but toys are mainly considered discretionary spending, meaning people can choose not to buy them. (Source: CNBC)

Not all CEOs agree on a 2023 recession

However, not all CEOs agreed on what to expect from the Fed. Some didn't speculate, like Union Pacific (UNP) CEO Lance Fritz and General Motors (GM) CEO Mary Barra. United Airlines (UAL) CEO Scott Kirby was one of the more optimistic who spoke yesterday, saying business travel was growing steadily but did admit that traveler demand was plateauing. He admitted that the Fed might induce a "mild recession".

On the other hand, Dimon went into detail about expectations for the Fed, expressing concern about pressures on borrowers with the Fed expected to raise rates to 5%. He cautioned that the rate might not be sufficient to get inflation under control, supporting his view that the Fed won't bring down rates any time soon. That would contribute to his predictions of a hard landing around the middle of next year.

Supply Chains Expected to Remain Strained

Dimon also pointed to a series of other factors, or "storm clouds", that could build to his oft-warned "hurricane", including the war in Ukraine and trade issues with China. He argued that a stronger dollar (DX) weighs on international trade, citing oil (CL) as an example: Oil might get even more expensive for weaker currencies forced to match the difference.

Dimon's comments were supported by CEO Fritz, who said that shipping was slowing down, indicating that consumer spending is waning and the economy is under pressure. He pointed to the housing market and parcel shipments. General Motors CEO Mary Barra also said she expects supply chains to remain strained next year, with semiconductor shortages still expected to be challenging, though slowly improving over time.

Conclusion

After the CEOs of companies trading in the Dow Jones expressed concern over the economic situation, the DJIA (Wall Street) fell 1.0% on Tuesday. The comments were seen as driving a rout in the markets as it revived concerns over how the Fed's policy could impact the economy in the medium term. Tech stocks (US-TECH 100) came under pressure, too, falling 1.9%, as Dimon's comments on a "mild to hard recession" potentially hitting next year brought back worries about what the Fed might do when it meets next week on December 13-14. After that, US corporations are preparing for a general consumer spending downturn next year.


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