A Mild Recession?

There’s still a lot of caution among management teams

Succinct Summary: There is a lot of hope that the macroeconomic outlook is improving, but at least according to Procter and Gamble’s CEO “that’s really not the reality though.” There’s still a lot of caution among management teams and the base case appears to be that we will have a mild recession. Several Fed members spoke last week and indicated that even though they are pleased that goods inflation is coming down, they are closely watching inflation in service industries, which continues to run above trend. They seem to be firmly committed to a restrictive monetary policy.

---

Editor’s Note: Last week was the first big week of the earnings season, so everything outside of the Macro section will only be available for premium subscribers this week. We picked up a lot of good content including quotes on the state of capital markets, China’s reopening, how to prepare for AI, deepwater oil drilling, and why onion rings may be the best investment of 2023 (just kidding, kind of). To read this week’s full issue, subscribe below.

---

Macro

Everyone wants things to be better but that’s not the reality 

"The world seems to want everything to be better, as do I. That's really not reality though. There's an incredible amount of uncertainty that remains…It's just not an easy time to be taking up guidance to the top range of possibility." - Procter & Gamble (PG 0.00%↑) CEO Jon Moeller

There is an air of caution 

"We’re also seeing organizations in every industry and geography exercise caution as some parts of the world are in a recession and other parts are anticipating one." - Microsoft (MSFT 0.00%↑) CEO Satya Nadella

"We're cautious about the level of economic activity and seeing some slowdown in inflation in GDP and what that translates into in terms of demand from our clients…We're just seeing cautiousness while people wait to see how the economy plays out in 2023. And so we're cautious on it as well." - M&T Bank (MTB 0.00%↑) CFO Darren King

People seem to be expecting a mild recession

"We’re also seeing organizations in every industry and geography exercise caution as some parts of the world are in a recession and other parts are anticipating one." - Microsoft (MSFT 0.00%↑) CEO Satya Nadella 

"The consumer spending across our customer base has slowed…But that consumer spending is strong…So far this month actually, it’s back up 6, 7%…The consumers have money in their accounts. They spend it down a little bit. They still have a lot there. So, my belief is a mild recession." - Bank of America (BAC 0.00%↑) Chairman & CEO Brian Moynihan

The Fed appears to want this 

"Bringing inflation down is likely to require a period of below-trend growth and some softening of labor market conditions. But restoring price stability is essential to achieving maximum employment and stable prices over the longer term, and it is critical that we stay the course until the job is done." - Federal Reserve Bank of New York President John Williams

The Fed recognizes that inflation has come down some

"We’re beginning to see the kind of actions that we need to see. Good signs that things are moving in the right direction ... That’s an important input into how we’re thinking about where policy needs to go. We’re starting to see our policy actions do what they’re intended to do. But I do believe we have to continue raising ... and then hold for a while so that we get back to price stability in a timely way." - Federal Reserve Bank of Cleveland President Loretta Mester Cleveland

But services inflation is still above target

"Special circumstances, now mostly in the rearview mirror, pushed up prices in particular sectors, like energy, manufactured goods and housing. But inflation then spread to a broad set of services, and this broader inflation is what shapes the outlook today." - Federal Reserve Bank of Dallas President Lorie Logan

"inflation for other services besides shelter has remained high, and this gear is only starting to turn." - Federal Reserve Bank of New York President John Williams

Wages are a key input to services inflation

"...nonhousing services are running at about 4.4% annualized inflation on a 3-month basis, similar to their 12-month pace. There are a range of views on what it will take to bring down this component of inflation to pre-pandemic levels. Since wages constitute a significant fraction of costs for most firms in nonhousing services, one possible channel is through a weakening in labor demand." - US Federal Reserve Vice Chair Lael Brainard 

There are some signs of softening labor markets

“I think we've seen on the labor side, wage inflation has moderated a bit.” - Fastenal (FAST 0.00%↑) CFO Holden Lewis

"We also see some loosening in the labor market and some modest improvements in equipment availability." - J.B. Hunt Transport Services (JBHT 0.00%↑) CEO & Director John N. Roberts

"The layoffs, you're starting to see that in the news, which there's the good news and the bad news. Obviously, the bad news is the layoffs, but the good news is they're really starting to focus on their cash burn because they know they need to hold on to their cash for a lot longer." - SVB Financial Group (SIVB 0.00%↑) Former President of Silicon Valley Bank Michael Descheneaux

Monetary policy will need to remain restrictive

"Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis." - US Federal Reserve Vice Chair Lael Brainard

Hopefully, the Fed doesn’t overshoot

"The reality is that I think they have to be more careful where they are now because they can overshoot. Before they weren’t taking inflation on, to your point, a year and a half ago. People were telling them this isn’t transitory. That day went by. They’re going to be resolute to prove that they have it. On the other hand, they’ve got to be more careful of overshooting." - Bank of America (BAC 0.00%↑) Chairman & CEO Brian Moynihan

International