The holidays are a time for gathering, celebrating, reflecting…and indulging. We’re not talking fruitcake here. Recipes passed down through the generations are honored at this most wonderful time of the year. Reflecting on our Italian heritage, Danielle cooks her grandmother’s lasagna and sausage bread and pines for her great aunt’s Anginetti. QI’s Dr. Gates’ mouth waters at the thought of his grandmother’s homemade biscotti with that touch of anise smothered in powdered sugar. The best of the best, though, is the cream sherry cake his family has made for generations at Christmastime. Unlike Danielle’s meatball recipe, which is Top Secret, we happily share the recipe for the cake here. You’ll need: One package of yellow cake mix; one small box of instant vanilla pudding; half a teaspoon of nutmeg; one teaspoon of vanilla; and three-quarters of a cup of cream sherry wine. Follow the directions on the cake mix box with the exception of replacing three-quarters of a cup of water with the cream sherry. We accept your gratitude in advance.
“See Sweet Season” brings to mind a different kind of C-suite. Due to last week’s merriment, you may have missed the latest CFO Survey. The quarterly collaboration between Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta revealed inflation remains CFOs’ top worry alongside availability and quality of labor, followed by tightening monetary policy. Per survey director John Graham, these concerns have caused, “CFOs to be pessimistic about the overall economy in 2023.” Despite the fourth quarter’s three-tenth uptick to 53.4 from 53.1 and the second quarter’s post-pandemic low of 50.7 (purple line), the prevailing level remains recessionary. We’re reminded of the Great Recession’s 2008 third quarter bounce just before Lehman failed, pushing optimism to its ultimate 2009 trough.
In another Great Financial Crisis parallel, CFO optimism with regard to their company’s financial prospects is still deteriorating. The 67.2 in 2022’s fourth quarter echoed that of the 67.9 level at the onset of the 2007-09 recession (orange line). Adding to this evidence, 31% anticipate negative real GDP growth in the next four quarters, up from 30% in the third quarter and just 6% in 2021’s fourth quarter. The distribution of CFO growth expectations is also telling. The two largest buckets denote the highest conviction. Of them, 25% expected growth between -3.0% and -0.1% while 26% are calling for growth between 0.0% and 1.4%.
These expectations are on a razor’s edge. As we’ve penned before, the economy is a “rounding error” shy of recession being declared as starting in January 2022. The least forgiving metric in recession of revenue, which is reported in nominal terms. Revenues are to GDP as GDP is to revenues. Recall your econ textbooks that price times quantity equals GDP. Ergo, the same calculation produces revenues. In the next year, CFOs see nominal revenue growth slowing to 4.7% (yellow line). But they also expect prices to rise 5.2% (blue line). The difference between these two projections proxies the volume of activity, or in economist-speak, real GDP. The latest calculation equals -0.5% (red line).
When asked directly about their revenue growth expectations, 0.7% was the weighted mean and weighted median response which are weighted by sales revenue giving larger companies a bigger say. This is more than a fine point. We’ve been closely tracking DailyJobCuts.com data for December. The weakness this month has skewed heavily towards small business closings as opposed to big company layoffs. Call this role reversal vis-à-vis November as larger firms have the latitude to stay out of the holiday headlines. Some 228 closures had been counted as of yesterday, nearly 100 more than November’s full month tally of 139. The flip side is November’s headcount reduction was a gigantic 48,056, nearly 30,000 higher than the 18,815 announced through December 27th.
For context, Street analysts’ estimates aggregated by FactSet have full-year 2023 revenue growth for the S&P 500 to come in at 3.3%. As for inorganic revenue generation, with the fourth quarter almost complete, the 39% annual decline in the M&A deal count (green line) tilts 2023 economic prospects to the downside — year-over-year compression of -30% or more only has occurred during recessions dating back to 2001. As for organically growing the business, last week’s durable goods report for November flagged a stalling out in capital expenditures via the closure of the spread between core capex new orders and shipments. The average for October and November essentially was zero. In addition to last Wednesday’s announcement that it would reduce headcount by around 5,000 in 2023, Micron Technology also reduced its capex spending outlook. Best known as a supplier to computer makers, the semiconductor supplier is being buffeted by shrinking PC sales and slashed server spending expectations.
As inflation anxiety gives way to growth concerns in the new year, reports such as durable goods and industrial production will garner increased attention as disinflationary challenges pressure pricing power. Critically, the CFO Survey closed on December 2, predating the Fed’s 50-basis point hike to 4.25%-4.50% on December 14. Before that hike, 30% of CFOs said the 3.75%-4.00% Fed funds rate was sufficiently high to cut capital spending plans. Meanwhile, 14% said further increases in borrowing costs would catalyze reduced capex. The average ‘trigger’ level for the terminal rate was 6.4%. For the sake of strapped U.S. households, it’s a good thing C-Suite occupants don’t make monetary policy.