American business leaders are talking less about the possibility of a recession.
Since the Federal Reserve initiated interest rate hikes in early 2022, corporations and investors have been anticipating the potential implications of a recession.
However, this topic is gradually fading from prominence during earnings calls conducted by major U.S. companies, as it appears increasingly probable that inflation has been mitigated without triggering an economic downturn.
According to data from the market analytics platform FactSet, the term “recession” was mentioned on the fourth-quarter earnings calls of only 47 companies in the S&P 500. This represents the lowest occurrence since the conclusion of 2021.
Looking at it from another perspective, compared to the same quarter a year earlier, the term was referenced on less than one-third of the calls.
Moreover, despite emerging from a period marked by economic uncertainties, the incidence of the term “recession” during the fourth quarter fell below the five- and 10-year averages of 85 and 61, respectively.
Sweeter chatter
It emerged when discussions of a potential recession did arise, often echoing a more optimistic tune. Executives pointed out a significantly improved macroeconomic environment compared to previous quarters.
John Wall, the Chief Financial Officer of technology firm Cadence Design Systems, observed this shift, noting, “Everyone seems to be more optimistic this time this year compared to this time last year. At this time last year, everyone was asking me, ‘When was the recession going to happen?’” as per CNBC report.
Despite a slight slowdown from the preceding quarter, the gross domestic product (GDP) expanded by 3.2% in the final quarter of 2023. This evident growth across all sectors indicates that the economy has successfully avoided a recession that was once seen as almost inevitable. Wall’s confidence is echoed by many.
According to a CNBC survey of over two dozen finance chiefs, nearly half anticipate the Federal Reserve effectively managing inflation without triggering a recession, a scenario often referred to as a “soft landing.” Additionally, nearly 15% of respondents to CNBC’s CFO Council survey believed that a recession had already occurred.
The improved sentiment coincided with a remarkable performance by companies, with almost three out of every four surpassing Wall Street expectations in the latest quarter, as reported by FactSet.
One such example is commercial real estate developer CBRE, which exceeded analysts’ consensus estimates for revenue and income in the fourth quarter. Emma Giamartino, the company’s CFO, indicated that CBRE’s full-year 2024 guidance hinges on the Federal Reserve’s decision to lower short-term interest rates and the economy avoiding a recession.
CBRE forecasts core earnings per share between $4.25 and $4.65 for the full year, with a significant portion expected in the second half of the year, aligning with the anticipated commencement of interest rate adjustments by the central bank.
Eye on the consumer
In the past few years, companies serving consumers have been closely monitoring customer behavior for signs of vulnerability, especially as inflation has put pressure on household budgets.
Costco, the wholesale giant, reported increased popularity of its Kirkland Signature store brand as shoppers gravitated towards value amid rising prices. However, CFO Richard Galanti noted that this trend of trading down was short-lived.
“People were, in my view, switching a little bit out,” Galanti remarked to analysts earlier this month. He added, “But things are different now. We don’t see that happening as often.”
Extra Space Storage has observed sustained demand as customers navigate changing living arrangements, particularly with 30-year mortgage rates hovering near 7%. CEO Joseph Margolis revealed that almost half of storage users are acquiring units as they transition between apartments.
“The housing market certainly will help, but it’s not the sole driver of demand for self-storage,” Margolis emphasized during the Salt Lake City-based firm’s recent call with analysts. “More transition is just good.”
While Extra Space remains cautious about expecting lower interest rates too soon, the company’s forward-looking financial guidance does not anticipate rate decreases in time to bolster the summer housing market.
Nevertheless, Margolis acknowledged that avoiding economic contraction bodes well for business. Extra Space was among 37 S&P 500 companies using the term “soft landing” during fourth-quarter earnings calls, marking the highest occurrence in at least three years, according to FactSet data.
“A strong economy is always better than a weak economy,” Margolis asserted. “All indications now suggest that we’re heading towards more of a soft landing than a recession.”
Improving dealscape
Executives hope that mergers and acquisitions will pick up in 2024 if interest rates go down after a recent slowdown.
Host Hotels noted that the transaction market stands to benefit from improved macroeconomic sentiment, leading to increased visibility on operating performance. The upscale hotel investor, with $2.9 billion in total liquidity, is well-positioned to pursue acquisitions.
This optimistic outlook resonates throughout various sectors, ranging from real estate to technology. Vulcan Materials, a company specializing in asphalt and concrete, described 2024 as a year of “catch-up” in the industry.
“While it was relatively quiet in 2023 with many uncertainties, I anticipate a very active 2024,” remarked CEO J. Thomas Hill regarding the merger and acquisition landscape. “I expect us to finalize some deals.”
‘Difficult to predict’
Still, some executives are cautious about predicting a stronger year, even if a recession is not on the horizon.
Lowe’s CEO Marvin Ellison voiced uncertainty about the timing of a potential rebound in demand for home improvement products. Despite growing expectations of a soft landing, he highlighted the ambiguity surrounding the timeline for consumers to adjust their spending habits, even after interest rates begin to decrease.
Ellison identified depressed home sales as a continuing concern, noting that mortgage rates remain high enough to deter individuals locked into lower rates from relocating, which typically stimulates home improvement spending.
