A new CNBC- CFO council survey found that more than three-quarters (77%) of CFOs believe that the U.S. will go through a recession during the first half of next year (January- June 2023). The survey was published in the beginning of June and respondents expect this to occur due to the ongoing issue of inflation that is disrupting global markets.
More than half of the CFO respondents also expect the Dow Jones Industrial Average to fall below 30,000 points before it begins to rise again. That number is equal to an additional 9% fall from current levels, meaning that the worst of the market downturn is behind us, but there is still a while to fall before it bottoms out.
The reasoning behind this comes with no surprise: steady inflation and skyrocketing gas prices have become a major problem in the US and are affecting every household and business. But these issues are not only affecting prices and revenue, they are affecting the economic outlook as well. The IBD/TIPP Economic Optimism Index in the US fell to 41.2 in May of 2022, while the six month outlook reached its lowest point since 2011.
From an optimistic standpoint, none of the CFOs who participated in the survey thought that the recession won’t occur the second half of 2023. Not only that but they believe that the recession won’t extend at all into the second half and the economy will recover by then. This is key in understanding how to approach the projected recession.
Preparing for a “Short” Recession
The survey gives us a good indication of what actions CFOs plan to take. In terms of spending, 36% of CFOs said they plan to increase their spending over the next year, while only 18% said they plan to decrease their spending. Close to half (46%) said they plan to keep their spending limits as they are.
The wide variety of answers does not indicate an overwhelming trend in any direction, and it seems that each company is making calculated decisions in terms of spending. Perhaps a big part of this mentality is the fact that there is a strong belief that the recession is temporary instead of an outright crash that seems like it will never end, as was the case in the past.
In terms of employee hirings, the numbers were quite similar to anticipated spending plans. Fifty-four percent of CFOs said their company’s staff will increase over the next 12 months, while 18% said their staff will decrease over the same time period.
The reason for the high percentage of companies looking to increase their staff could be a bigger indicator of the talent shortage and the need to fill those spots rather than sentiment about a recession or not. Essential hirings need to be filled for a company to be profitable whether there is a recession or not.
Instead, it might be better to focus on the most important factor from the survey- that nobody believes the recession will last into the second half of 2023. Based on that, there are many things that CFOs can do to be prepared. It is important to note that the length of time is significantly shorter than previous recessions, meaning that it is hard to take away the same lessons from those longer lasting and more surprising recessions of the past.
Courses of Action
After establishing the differences between previous recessions and this one, companies still need to complete step one: Immediate action. This starts with understanding where your current cash position is and where it is going to be both in the short term (the next few months), and the “long run” of the middle of 2023.
After getting an immediate snapshot of cash positions and ensuring survival, the next step is to reduce operating expenses. For every CFO this can look quite different, and the fact that 54% of CFOs from the survey are looking to increase their company’s staff doesn’t contradict the need for reducing operating expenses. There are plenty of ways to reduce expenses outside of employee cuts.
In fact, for a shorter recession that is expected such as this one, cutting staff as a short term solution with the expectancy of hiring back again when it’s over can be a bad idea. The expensive hiring process and skills shortages can erase any benefits the company may have gained from those cuts. While looking elsewhere for budget cuts is the best option, sometimes there is no other choice but to let employees go.
After immediate action is taken and cutting costs and ensuring survival throughout the recession is ensured, CFOs can move to phase 2: Digging deeper into analytics. Executives don’t just want to survive a recession, they want to thrive and come out stronger, and they look to the CFO for guidance on how to do so.
By using FP&A software solutions, finance teams can drill down into the data and go far deeper into understanding the ins and outs of the numbers. The most important aspect of this during a recession is scenario planning, which will help financial planners play out all the possibilities of headcount, revenue, and the supply chain, and how it will be affected based on the length of the recession and other factors outside of their control.
Being prepared for all possible scenarios will allow every department in the company to make better and more informed decisions. Whether you are part of the 36% of CFOs that plan to increase their spending over the next year, or whether you are part of the 18% that plans to decrease staff, using an FP&A software solution to plan for the future will help your company not only get through the recession, but also thrive in it.