Recession talk is fading away in corporate America | Private Equity Weekly
Among U.S. business executives, there is less and less discussion about the possibility of a recession. Ever since the Federal Reserve began raising interest rates in early 2022, businesses and investors have been bracing for the consequences of a recession. Now, the topic has lost its luster on earnings calls held by the nation’s largest companies, as the odds grow that inflation has cooled without triggering an economic contraction. According to market data platform FactSet, 47 companies in the S&P 500 had the word recession appear on their fourth-quarter earnings calls. This is the lowest number since late 2021. Another way to look at it: Compared to the same three-month period a year ago, fewer than a third of the calls mentioned the word. Despite a period plagued by economic concerns, the fourth-quarter statistics were below the five- and 10-year averages (85 and 61, respectively). Sweeter Chatter When recession chatter does occur, the tone tends to be sweeter. Senior executives noted that the macroeconomic environment was better than in previous quarters. “Everyone seems more optimistic at this time this year than at this time last year,” said John Wall, chief financial officer at technology company Cadence Design Systems. “This time last year, everyone was asking me, ‘When is the recession going to happen?'” Gross domestic product growth in the final quarter of 2023 was 3.2%, although that was lower than the growth rate in the previous three months by all measures. Indicators on goods and services clearly indicate that the economy is avoiding a recession once thought almost inevitable. Cadence’s Wall isn’t the only one to gain his trust. Nearly half of more than two dozen Treasury secretaries surveyed by CNBC said they expect the Fed to control inflation without a recession, a scenario known as a soft landing. Another nearly 15% of respondents to CNBC’s Council of Chief Financial Officers survey said they believed a recession had already occurred. Sentiment improved as nearly three-quarters of companies beat Wall Street expectations in the latest quarter, according to FactSet data. One of them was commercial real estate developer CBRE, which beat consensus analysts’ estimates for both revenue and revenue in the fourth quarter. Looking ahead to 2024, Chief Financial Officer Emma Giamartino said the Dallas-based company’s full-year guidance “depends” on the Federal Reserve cutting short-term interest rates and the economy emerging from recession. CBRE expects full-year core earnings per share to be in a range of $4.25 to $4.65. But Giammartino said there will be more than usual in the second half of the year, coinciding with the central bank now expected to start easing interest rates. Focus on consumers In recent years, as inflation has squeezed wallets, consumer-facing businesses have begun monitoring their customer behavior for signs of weakness. Costco Wholesale Club says its Kirkland Signature store brand is growing in popularity as shoppers prioritize value amid rising prices. But Finance Minister Richard Galanti said the decline in trade was short-lived. “It seems to me that attitudes have shifted a little bit,” Galanti told analysts earlier this month. “But things have changed. We don’t see that anymore.” Extra Space Storage said that as a result Demand has remained steady as customers juggle their living situations, especially with 30-year mortgage rates approaching 7%. Chief executive Joseph Margolis said nearly half of storage users said they received storage units when moving between apartments. “The real estate market will certainly help, but it’s not the only driver of self-storage demand,” Margolis said during the Salt Lake City-based company’s conference call with analysts late last month. “More More transitions are good.” Extra Space is wary of prematurely anticipating a fall in interest rates. In drafting guidance for future financial performance, the company does not expect levels to fall in time to boost the summer housing market. Still, Margolis acknowledged that avoiding an economic contraction would be good for business. Extra Space was one of 37 S&P 500 companies to use the term “soft landing” during its fourth-quarter earnings call, the highest number in at least three years, according to FactSet data. “A strong economy is always better than a weak economy,” Margolis said. “All signs now are that we will see more of a soft landing than a recession.” Improving deal environment After rising interest rates caused a sharp slump in M&A activity, executives want to know whether deal volumes will improve in 2024 if borrowing costs fall. There will be a rebound. Host Hotels said the trading market could benefit as macroeconomic sentiment improves and visibility into operational performance increases. The upscale hotel investor said it has total liquidity of $2.9 billion and is well-positioned to make acquisitions. This is a common prospect across industries from real estate to technology. For example, leaders at asphalt and concrete maker Vulcan Materials called 2024 a year of “catch-up” in the sector and expected more deals. “While 2023 has been pretty quiet with a lot of unknowns, I think 2024 is going to be very busy,” Chief Executive J. Thomas Hill said of the M&A environment. ‘I hope we can get some deals done.’ ‘It’s hard to predict’ To be sure, some executives are less sure they’ll have a stronger year, even if a recession is averted. Lowe’s CEO Marvin Ellison said it’s “still difficult to predict” when demand for home improvement products will pick up. While growing expectations of a soft landing are reason for optimism, he said it’s unclear how long it will take for consumers to change their spending habits, even after interest rates begin to ease. Ellison said the slump in home sales remains a concern. He said mortgage levels were still too high to encourage those with lower interest rates to move, which is often a natural catalyst for home improvement spending. The North Carolina-based retailer is also hurting as post-pandemic Americans choose to spend money on experiences such as travel, football games or concerts rather than buying goods, the CEO said. “Consumer financials are in good shape, but customers continue to show a preference for spending on services in the post-pandemic period,” Ellison told analysts late last month. “While we expect these trends to normalize, But the timing is uncertain.”
