‘Plan for the Worst’: CEO Confidence Wanes as Corporate America Prepares for Recession

A trader works on the floor of the New York Stock Exchange in a file photo. (Mario Tama/Getty Images)

CEO confidence in the U.S. economy is waning as survey results and comments from top executives suggest a dim outlook.

The Conference Board’s second-quarter measurement of CEO sentiment revealed that 57 percent anticipate the economy to go through a “very short, mild recession.” This represented the fourth consecutive quarter of declining expectations.

According to the business research group’s regular survey, 61 percent of CEOs noted that general economic conditions were worse compared to six months ago, while 37 percent stated that conditions in their own industries were worse.

“CEO confidence weakened further in the second quarter, as executives contended with rising prices and supply chain challenges, which the war in Ukraine and renewed COVID restrictions in China exacerbated,” said Dana M. Peterson, chief economist of the Conference Board, in a statement. “Expectations for future conditions were also bleak, with 60 percent of executives anticipating the economy will worsen over the next six months—a marked rise from the 23 percent who held that view last quarter.”

A recession is defined as two consecutive quarters of negative economic growth, according to the National Bureau of Economic Research. But the Bureau broadened its recession indicators, looking at four other key areas: payroll employment, industrial output, volume of sales in the manufacturing and trade sectors, and inflation-adjusted personal income.

Shoppers line up outside a shoe store in New York on May 19, 2021. (Ed Jones/AFP via Getty Images)

Business leaders have been open about their consternation surrounding the broader economy.

Bob Bilbruck, CEO at Captjur, a technology and development services firm, shared his colleagues’ pessimistic assessment of the economy.

“I think many CEOs like myself know we are in a recession. We also know things are not all roses as the political class would have you believe.”

He also believes that surging gasoline prices, which hit a fresh all-time high of $4.622 per gallon on May 31, will force consumers to stop spending, which is bad news for the broader economy, which is two-thirds consumption.

“I think many CEOs are digging in to ride out the storm and actually see the worsening recession as a good thing,” Bilbruck said. “Money has been too easy too long, it’s had a very negative effect on the real economy. Wall Street has loved it, but all good times come to an end—this time I think it’s going to be a bad one much like 2008.”

Tesla and SpaceX CEO Elon Musk recently wrote on Twitter that a recession is “a good thing,” adding that an economic downturn could last for up to 18 months.

“Yes, but this is actually a good thing. It has been raining money on fools for too long. Some bankruptcies need to happen,” he said.

“Companies that are inherently negative cash flow (ie value destroyers) need to die, so that they stop consuming resources.”

Speaking at The Wall Street Journal’s Future of Everything Festival earlier this month, Wells Fargo CEO Charlie Scharf conceded that the country was heading for some type of economic downturn.

“I think it’s going to be hard to avoid some kind of recession,” he told the conference.

“But I also get the fact that everyone is so strong going into this, [which] should hopefully provide a cushion so that whatever recession there is, if there is one, is short and not all that deep.”

Morgan Stanley CEO James Gorman told shareholders at the company’s annual general meeting on May 26 that the odds of a recession are at less than 50 percent.

Anthony Capuano, CEO of the hotel chain Marriott International, told reporters at the World Economic Forum last week that “it certainly seems we’re headed” toward a recession.

Paul Knopp, the KPMG CEO, revealed to Yahoo Finance Live that “we’re on the watch for a potential recession.”

“It’s unclear as to whether or not that’s going to happen in the U.S. or not. But it’s certainly something that we’re closely watching,” he said.

But not all of Corporate America’s leaders think the sky is falling.

Best Buy CEO Corie Barry noted in a recent earnings call that the consumer electronics retailer is “not planning for a full recession,” although the company is “factoring in for softer demand.”

Mansoor Al Mahmoud, Qatar Investment Authority’s CEO, told CNBC that the fund is not as pessimistic as many business leaders worldwide are. However, if there is a contraction in the economy, “it will be a light recession.”

Looking ahead, businesses, consumers, and investors should employ some caution under these conditions, recommends Goldman Sachs CEO David Solomon.

Overall, Mike Davis, founding partner at Olive Tree Ridge, a multi-strategy asset management firm, argues that the next recession will be different than what transpired in 2008, particularly on the labor front.

“The unemployment rates are all-time low. It’s very difficult to get great talent, retain great talent, and becomes more expensive to do so,” he stated.

“This is not the first time we’re finding ourselves in inflationary times. From a company perspective, I would spend some time looking at history. We are not alone.”

Who Will Survive?

Since the pandemic started more than two years ago, investors were ebullient over internet companies, from video conferencing (Zoom) to home entertainment (Netflix).

This year, however, it has been an entirely different story. The tech selloff has been brutal, with the Nasdaq Composite Index plummeting 25 percent. Many tech giants have offered lackluster earnings and provided weak guidance.

In this type of environment, companies need to “actually plan for the worst,” Davis said.

“I do think that we don’t even know where the bottom is yet, but a lot of people are trying to play the timing game,” he said. “I don’t think that’s the right move at all. Things are going to get worse.”

Until companies’ indicators prove otherwise on a consistent basis, it will be critical for private enterprises to prepare, likening the situation to the classic “Ant and the Grasshopper” fable.

“Cash is the almighty,” he said.

Indeed, businesses with healthy margins and produce physical things are back with a vengeance. The FTSE 100 Index and S&P/TSX Composite Index, benchmarks with a focus on commodities and industry, have slipped 1.5 percent and 2 percent, respectively.

Peter Oppenheimer, chief global equity strategist and head of Macro Research in Europe at Goldman Sachs, calls this the “postmodern cycle.”

“We are seeing it quite quickly,” Oppenheimer wrote in a note. “It’s a reminder that we’re still living in a very human, physical world. The value of those physical things, including human capital, is actually going up.”

If companies can routinely deliver high-quality products rather than inform customers that they are out of stock or the quality of goods has slipped, customers will appreciate it, even if costs rise, Davis noted.

Financial experts agree: If the fundamentals are phenomenal, businesses will be able to withstand the next economic downturn.