Cheer Up, Corporate America. Your Gloom Is Part of the Problem : Business


The official economic forecast is still chilly for 2023, but a host of indicators suggest things were heating up, not cooling, in the first month of the year. Auto sales had their best month since the first half of 2021. The housing market improved as mortgage rates drifted below 6%, attracting more buyers. And Friday’s jobs report was surprisingly strong.

Now that inflation has shown signs of easing, the Federal Reserve also seems less determined to raise the unemployment rate. Add it all up, and it may be corporate leaders who need to chill a little. Instead of all the noise we heard during earnings season about bracing for a recession, perhaps executives should be preparing to respond to a growth environment that is stronger than they anticipated. That would be better for their companies and could help ensure the economy doesn’t repeat the over-strained supply chains and undersupplied inventories it experienced not so long ago.

After JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon issued his infamous “economic hurricane” warning last year, a new-year survey found executives still worrying about slow growth and a recession in 2023, with a tepid economy lingering until mid-2024. In an interview with CNN this week, Bank of America Corp. CEO Brian Moynihan maintained his view that the US will see a “mild recession” this year, and layered on worries about the US government defaulting on its debt if Congress can’t agree to raise the ceiling for borrowing. “We have to be prepared for that, not only in this country but in other countries around the world.”

I’m sympathetic to executives who are leery of getting too optimistic at this stage. It’s still easy to find reasons to be negative if one is so inclined. As recently as mid-December, the Federal Reserve was forecasting that the unemployment rate would rise to 4.6% at the end of 2023, which serves as an anchor of caution for companies such as banks. The ISM Manufacturing Index, a well-followed barometer of factory-owner sentiment, just registered its third consecutive month of contraction.

So it’s reasonable for many companies to say, “I haven’t yet seen the uptick in my own company’s data, and the economists and forecasters we pay to inform our outlook are telling us that we should prepare for a mild recession this year.”

But in the aggregate, rising worker incomes drive demand, and January income growth is shaping up to be historically strong. That’s probably one of the reasons we’ve seen improvements in the auto and housing industries already. And that’s going to spread throughout the economy.

I wrote about how various inflation adjustments would provide a one-off boost to household incomes in January, and the strong jobs report will compound that impact. Aggregate weekly payrolls — a measure combining jobs, hours worked and wages — rose by more in January than any single month in 2021 or 2022. It probably means that when the personal income report comes out at the end of the month, it will show that household incomes grew at their fastest pace in more than a decade outside of a few pandemic-affected months.

Even the aforementioned ISM manufacturing index had some nuance in it that suggested improvement in the future. Commentary in the report indicated that new-order rates were depressed because of buyer and supplier disagreements about price levels and delivery lead times, and that those issues should be resolved by the second quarter.

The situation facing homebuilders might be a good way of thinking about this: They are hoping to push their suppliers to cut costs before embarking on a new building cycle in a few months.

If corporate executives need more of an excuse to cast away some of their 2023 negativity, I’ll give them two important reasons. First, the consensus forecasts for the US economy this year are already looking antiquated. When the Federal Reserve made its 4.6% unemployment forecast the rate stood at 3.6%. Two months later it has fallen to 3.4% — moving in the opposite direction, with no indications that it is set to rise.

The concern people had heading into last week’s Federal Reserve meeting was that Board Chairman Jerome Powell would push back on some of the optimism financial markets had shown. But he chose not to do that and markets responded by rallying even more. This easing of financial conditions — rising stock prices, tightening credit spreads — serves to make the kind of dour economic outlook people were worried about in 2023 less likely.

The second reason corporations need to prepare for a better economy is that if they don’t, we run the risk of repeating some of the supply-chain mishaps we experienced over the past couple years. Retailers and wholesalers have been focused on reducing inventories and making sure they don’t have excess capacity in case the economy goes into recession. When demand ends up being stronger than expected, they could once again find themselves undersupplied. That would mean another round of shortages and inflation at a time when we hoped to be moving beyond those problems.

What we know for sure is that the labor market remains strong, January was a huge month for auto sales, the housing market appears to be on the mend and the Federal Reserve shows no interest at the moment in pushing back against the easing of financial conditions that has happened in markets as investors grow more optimistic. Corporate executives remain pessimistic at their peril.

More From Bloomberg Opinion:

• Whatever Keynes Said, Let’s Follow His Advice: John Authers

• If the Fed Is Suspected of Bluffing, It Has a Problem: Clive Crook

• When Markets Are This Hot, Should You Jump In?: Mohamed El-Erian

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.

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