As volatility in the market continues, opinions abound regarding the possibility of an economic recession in the U.S. in 2023. Many economists predict that a mild recession is likely on the horizon, while other analysts think a soft landing, in which the economy slows but doesn’t enter recession, is possible. In the face of uncertainty, many businesses are left wondering what steps they should take to prepare for a recessionary environment.

The interplay of various macroeconomic forces continues to drive the uncertain outlook. Since reaching a peak of 9.1% in June of 2022, inflation in the U.S. has steadily eased over the last few months, falling to 6.4% in January of 2023.[1] However, it may be too soon to know if the economy has truly turned a corner on the inflation front. One consideration is January’s stronger-than-expected jobs report, which showed that payrolls added 517,000 jobs, pushing unemployment to a 53-year low at 3.4%.[2] While perhaps positive news for businesses facing labor challenges, these employment gains could buoy consumer spending and add to inflationary pressures. The Federal Reserve has indicated it will continue to raise interest rates in 2023 in its ongoing fight to curb inflation, but the February fed funds rate increase of 25 basis points signals it is likely to do so at a more moderate pace than with previous rate hikes.

Taken together, it’s a complicated mix of factors that can be daunting for businesses looking to stay the course and position themselves for future growth.

“Market and economic volatility can be unnerving, but it’s important not to let it paralyze you as you’re steering your company through it,” said Head of PNC Commercial Banking Stephanie Novosel. “Mixed economic messages and contradictions in variables cannot short-circuit good planning. The key is balancing good shorter-term, nimble decisions without compromising your consistent long-term goals.”

In a turbulent environment, there are short-term actions businesses can take with longer-term objectives in mind:

  • Stay informed. Maintaining awareness of the geopolitical landscape and its potential effects on various sectors of the economy can help businesses plan and adapt in advance. 
  • Scenario plan regularly and keep choices current.  Review plans and assumptions frequently – annual planning is not sufficient in today’s business environment. In a scenario in which there is high inflation, low interest rates and excess liquidity, customers might be willing to pay more for goods and services. But there is a breaking point at which passing costs along to customers can no longer be the only option. What worked last year might not work again now or three months from now.
  • Continue to streamline and automate processes. Evaluate current business processes, systems, levels and suppliers. Then keep making adjustments that work now but also won’t create friction in the long term. This could include implementing new technology, but it’s important not to invest in low-value technology or suppliers in response to what could be only temporary cost pressures.
  • Review expenses, review margins. Most businesses could benefit from taking another look at expenses, from simple tangible line items all the way through to cost of capital, debt levels, fixed versus variable rates and potential hedging strategies. Perhaps even more importantly, businesses should examine productivity and margins for their potential longer-term impacts, as opposed to evaluating only straightforward expense reductions.
  • Consider opportunities. Disruption can present opportunity as well as challenges. Businesses should continue to consider the merger and acquisition landscape, along with other high-impact opportunities for capital investments, scalability and workforce transformation. It’s important to scenario plan regularly throughout periods of volatility.

Ultimately, planning for stability in uncertain times requires a willingness to balance short-term choices and long-term goals. “There are a lot of unknowns in play in the economic environment right now, and that’s not likely to change any time very soon,” Novosel said. “Achieving success will require taking a pragmatic approach to controlling what you can, contingency planning and working with business partners who can help you navigate the path forward and pull ideas together with confidence in where you’re heading.”

Ready to Help 

PNC can work with you to develop strategies to help you manage issues related to market volatility. For more information, reach out to your PNC Relationship Manager, or click here to contact us.

Sources

  1. https://www.wsj.com/articles/us-inflation-january-2023-consumer-price-index-f080e30b
  2. U.S. Department of Labor Monthly Job Openings and Labor Turnover Survey: https://www.bls.gov/jlt/