CEOs Gauge the Warnings As Economic Winds Shift

"Over the past week, business leaders have laid out in the starkest terms yet that a period of universal strength in the U.S. economy has given way to a muddled outlook in which a labor shortage, soaring stock markets and a healthy consumer are no longer givens.

Technology companies from Facebook parent Meta Platforms Inc. to Uber Technologies Inc. have sharply slowed hiring in recent weeks, and Elon Musk told staff at Tesla Inc. this past week that he plans to cut 10% of its salaried jobs.

Retailers such as Walmart Inc. and Target Corp., whose profits soared in the pandemic, reported that higher costs had begun to eat into earnings and that some shoppers were beginning to curtail spending. In recent weeks, stores that struggled with too little inventory last year because of supply bottlenecks have reported that they are carrying more apparel, appliances and furniture than consumers want.

"That hurricane is right out there down the road coming our way," JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said this past week. "We just don't know if it's a minor one or superstorm Sandy. You have to brace yourself."

At the same conference, Bank of America Corp. CEO Brian Moynihan had a more tempered outlook, saying his customers still aren't talking about recession fears. "We're in North Carolina," he said. "You've got hurricanes that come every year."

The American economy remains largely healthy. The U.S. added 390,000 jobs in May, and demand for workers remains historically strong, particularly in such service industries as restaurants and airlines. Job openings are close to record highs. Planes are full, hotels are booked and high-end retailers including Lululemon Athletica Inc. are raising prices in the midst of brisk sales.

"There's a lot of discussion and talk about a recession coming, but if you look at our building or been on an airplane recently you'd never notice it," Bob Nelson, a senior vice president at Costco Wholesale Corp., told analysts recently. The retailer said sales rose 10.8% during the most recent quarter.

Still, business leaders say they are increasingly preparing for a new normal in which companies' fortunes start to splinter as inflation persists and consumer budgets tighten.

Wage growth in May and April slowed from last year's average, the Labor Department said Friday. Existing-home sales were down 5.9% in April from the previous year, according to the National Association of Realtors. Consumers boosted their spending rapidly in April, but in the midst of indications that many were tapping their savings to do so.

Many large companies, including retailers and consumer-products makers, have been able to raise prices to offset rising costs for staffing and shipping.

Recently, companies such as Walmart and Procter & Gamble Co. have signaled that those conditions are changing and that they are bracing for a pullback in spending. They are bringing back more bargains and cheaper store brands as inflation takes a toll on lower- and middle-income shoppers.

Mr. Dimon said that U.S. consumers still have some six to nine months of spending power left in their bank accounts as the government's pandemic stimulus continues to pad consumers' wallets. At the same time, Mr. Dimon said the economy faces significant uncertainty as that money dries up and during geopolitical tensions.

Sanctions on Russia has badly disrupted global energy and commodity markets, sending inflation to high levels across much of the world and risking sharp slowdowns in the U.K. and elsewhere in Europe.

The Federal Reserve is raising interest rates to cool demand and lower inflation, which in the U.S. is running at around a four-decade high. Officials are set to follow last month's half-percentage-point rate increase, the first since 2000, with additional half-point increases at their meeting this month, on June 14-15, and again in late July.

The Fed is hoping to achieve a "soft landing" in which demand cools by enough to bring down inflation but not so much that the U.S. economy slips into a downturn, marked by declining economic output and rising joblessness.

Fed officials say a soft landing is possible -- for example, if the slowing economy causes companies to eliminate excess job vacancies without significant job cuts. But plenty of observers expect or worry that the landing will be painful, and Fed Chairman Jerome Powell has conceded that is a possibility.

"It is going to be a challenging task, and it's been made more challenging in the last couple of months because of global events," Mr. Powell said in an interview last month

A major reason for the concerns is that the Fed is moving rates up at the most accelerated pace in decades. They could compress the entire series of rate increases from 2015 to 2018 into a matter of months this year.

Uncertainty over how high rates will rise represent another source of worry.

"This is among -- if not the most -- complex, dynamic environments I've ever seen in my career," Goldman Sachs Group Inc. President John Waldron said at the banking conference. "The confluence of the number of shocks to the system to me is unprecedented."

On Wall Street, investors' attempts to figure out whether the economy will cool down just the right amount or slip into a full-blown recession has led to dramatic swings in markets.

Just two weeks ago, the S&P 500 nearly entered a bear market -- a fall of at least 20% from its January peak -- after a brutal few sessions kicked off by disappointing earnings from big-box retailers that heightened investors' fears of a looming recession. The next week, all three major indexes jumped at least 6% for the first time since 2020 -- only to give back a portion of those gains this past week.

Overall, the S&P 500 has fallen about 14% this year, while the tech-heavy Nasdaq Composite index has lost more than 20%. Stocks fell again Friday even after the relatively strong jobs report, reflecting continued fears that the Fed might have to aggressively raise interest rates to tame inflation. Particularly hard hit were shares of tech companies, which have led declines this year and are seen as especially vulnerable to higher rates.

Falling stock prices don't necessarily mean that the market is signaling a recession. Analysts' expectations for corporate earnings over the next 12 months have actually increased since the end of last year, according to FactSet. Stock prices have nonetheless dropped, analysts said, in large part because expectations for higher short-term interest rates have driven up yields on U.S. government bonds.

That climb has offered investors a risk-free alternative to owning stocks and dragged down valuations, which had surged during the pandemic, by reducing the value of future earnings.

Matt Peron, director of research at Janus Henderson Investors, said his team closely parsed the Walmart and Target earnings that spooked markets last month. Their conclusion was that the earnings didn't send "an overall recession signal," reflecting instead a shift in consumer spending patterns.

His team's strategy this year has been to buy shares of companies with more free cash flow and lower valuations, shying away from riskier bets. Like many investors, the team is hopeful that inflation will moderate, reducing the chances that the Fed will have to raise rates so quickly that it would cause an imminent recession.

Still, Mr. Peron said, investors are caught now in an awkward spot, wishing at once that the economy will slow enough to bring down inflation but not so much that it would seriously damage corporate earnings. Such a conundrum is normal, he said, around this point in an economic expansion "but this cycle is particularly challenging" given the level of inflation.

Many economists and analysts have anticipated a slowdown for high-flying technology companies and in goods-producing sectors of the economy, which boomed during the pandemic. Supply chains were disrupted and inflation soared in large part because the composition of consumer spending, buoyed by government stimulus, shifted into goods and away from services. A rotation back to pre-pandemic consumption patterns has long been viewed by economists and Fed officials as a precondition for any slowdown in inflation.” [1]

1.  CEOs Gauge the Warnings As Economic Winds Shift
Cutter, Chip; Timiraos, Nick; Goldfarb, Sam. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 04 June 2022: A.1.