Clouds gathering, turbulence growing for 2023

By |  December 2, 2022
Companies can prepare for a tougher economic environment in 2023 by tracking cash flow closely, investing selectively and hiring prudently. Photo: AUDINDesign/iStock / Getty Images Plus/Getty Images

Companies can prepare for a tougher economic environment in 2023 by tracking cash flow closely, investing selectively and hiring prudently. Photo: AUDINDesign/iStock / Getty Images Plus/Getty Images

Businesses are preparing for a more challenging operating environment in 2023. 

After two years of frenetic commercial activity fueled by a post-pandemic recovery, strengthening headwinds will tap the breaks on a robust economy. Among the culprits: rising inflation, higher interest rates, a softening housing market, continuing supply chain disruptions, declining capital investments and escalating costs for wages and energy. 

The loss of some helpful economic initiatives is only adding to the downward pressure. 

“Government stimulus packages, ultra-low interest rates and strong money supply creation had been helping to compel business activity until mid-2022,” says Anirban Basu, chairman and CEO of Sage Policy Group. “All those fundamentals have been inverted.” 

Economists are adjusting their forecasts to reflect the new normal.

“We project real gross domestic product will increase by 0.7 percent in 2023,” says Bernard Yaros Jr., assistant director and economist at Moody’s Analytics. “The expectation for 2022 is 1.7 percent. Both figures represent much slower activity than the 5.9 percent increase of 2021.”

The current conditions should have a depressing effect on corporate profits, projected by Moody’s Analytics to increase at a 5.2 percent clip in 2023. That represents a decline from the 7.9 percent figure anticipated for 2022. Both estimates are much lower than the 25 percent increase of 2021. 

Strong employment

Reports from the field reflect early glimmers of a less robust business environment. 

“In the first half of 2022 many of our members were still experiencing high demand,” says Tom Palisin, executive director of The Manufacturers’ Association. “But as the year progressed, there was a significant slowdown caused by the labor shortage, inflationary issues and global events.” 

With its diverse membership in food processing, defense, fabrication and machinery building, Palisin’s association is something of a proxy for all American industry. The good news is that a strong employment environment among the association’s members – as well as at companies elsewhere in the nation – is helping to alleviate the negative impact of the economy’s headwinds. 

Moody’s Analytics expects a continuation of that favorable condition, forecasting an unemployment rate of 4.1 percent by the end of 2023. That’s not much higher than the 3.7 percent rate of late 2022. 

Many economists peg an unemployment rate of between 3.5 percent and 4.5 percent as the “sweet spot” that balances the risks of wage escalation and economic recession.

On the downside, low unemployment usually increases business costs by forcing employers to boost wages to attract scarce workers. Today is no exception to that rule.

“Our organization surveys members annually on their baseline entry level hourly wage figure,” Palisin says. “Increases typically run around 2.5 to 3 percent, but the figure was 8 percent in 2022.” 

While Moody’s Analytics forecasts a continuation of labor cost increases, they should moderate to 3.5 percent in 2023 – down from their current 5 percent. Even so, those increases are expected to affect business profitability. 

Worker shortage

The tight labor market hits business profitability in the form of higher wages and a scarcity of workers needed to produce goods and services. 

“Employers will be very focused on labor availability in 2023 as Baby Boomers continue to retire and the supply of immigrant labor has yet to fully recover from severe pandemic-related disruptions,” Yaros says. “Despite a slowing economy, layoffs are low, indicating that businesses are holding onto labor in a reaction to the hiring difficulties they encountered during the pandemic.”

When will workforce availability increase? Not anytime soon, say observers. 

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