A recent survey of CEOs suggests that most expect a recession in the U.S. but that it will be “short and shallow.” For that reason, many aren’t anticipating layoffs and some are even still hiring. It points toward a continuation of the current tight labor market, even as the economy cools in response to the Federal Reserve’s interest rate hikes and the ongoing banking turmoil.
CEOs continue to send the same message about the U.S. economy: A recession is looming but persistent strength in the labor market will endure. Typically, corporate executives would be focused on cutting costs and jobs amid such uncertain times, but they instead anticipate the job market will stay competitive. The seeming cognitive dissonance underlies the complexity of an economy that has suffered serial shocks in recent years — from the pandemic to inflation to rapid interest rate hikes to a mini banking crisis — but which nonetheless continues to exude signs of resilience.
The CEO confidence measure published by the Conference Board, where I am chief economist, reveals that for the fourth consecutive quarter the world’s top executives overwhelmingly anticipate a U.S. recession over the next 12 to 18 months. But they expect it will be short and shallow, with limited global spillover. An outsized 87% of CEOs envision this scenario, according to the survey’s second quarter iteration, while only 6% anticipate a deep recession with global spillover, and just 7% expect no recession at all. CEOs’ general pessimism continues to weigh on the overall gauge of confidence, which at 43 is little better than the lows achieved during the worst of the pandemic. (The Conference Board Measure of CEO Confidence is a quarterly survey conducted of nearly 150 CEOs in partnership with The Business Council. Respondents are members of The Business Council and a reading below 50 reflects more negative than positive responses to the survey.)
In past quarterly surveys, CEOs indicated that they expected that the Fed’s anti-inflationary efforts would drive this brief and mild U.S. economic downturn. CEOs continue to say they support the central bank’s aggressive rate hikes this quarter, even amid clear expectations of recession and an ongoing banking crisis. Indeed, 82% of CEOs think inflation should be the driving force behind the Fed’s monetary policy decisions. CEOs ranked other influences on Fed policy as being far less important, including the tight labor market (49%), banking stress and the potential for a credit crunch (43%), GDP growth (28%), and debt limit uncertainty (1%). Given that common gauges of consumer inflation hover well above the Fed’s 2% target and the risk of elevated inflation expectations becoming embedded, this view makes sense.
CEOs appear to be taking the lingering banking crisis in stride, and largely do not view it as likely to trigger a major recession, or even help cause one at all. Asked in the survey about different responses to the crisis, only 28% of CEOs say that they are increasing their own company’s liquidity, and just 17% are altering banking relationships. Most CEOs are “examining relationships” as opposed to taking drastic measures to shield themselves from residual crisis fallout: 62% of CEOs are examining relationships with their banks, 28% are examining their own risk management, 33% are examining their customers’ liquidity adequacy, and 30% are examining their suppliers’ liquidity adequacy.
The U.S. economy’s dour outlook notwithstanding, CEOs continue to believe that the labor market will defy expectations and remain largely afloat. Three sets of survey responses support this conclusion: First, only 20% of CEOs intend to reduce their workforce over the next 12 months. A surprising 33% expect to continue hiring and a sizable 46% anticipate no changes in staffing. Second, 75% of CEOs intend to raise wages by 3 percentage points or more over the next year and another 20% plan to raise wages by 1–3 percentage points over the same period. Meanwhile, a total of only 5% either anticipate no changes in wages (4%) or aim to cut wages (1%). Third, and finally, only 9% of CEOs expect no difficulty in hiring qualified workers, meaning 91% expect some or great difficulty.
Labor shortages are the key difference between the outlook today versus prior downturns. Additionally, labor shortages are why CEOs anticipate the recession to be “short and shallow.” Missing workers, strict immigration policy, and, most critically, an aging workforce, are creating an acute shortage in the supply of workers even as demand is likely to ebb in some industries over the course of this year. While workers aged 25 through 64 have largely returned to the labor market post-pandemic, those 65 and older are quickly exiting, creating a dearth of employees with skills and experience.
This backdrop makes CEOs’ responses somewhat easier to interpret, with CEOs falling into one of three camps. In the first camp, a significant share of CEOs are still hiring workers to fill roles vacated by retiring Baby Boomers. Those positions are most prevalent in industries requiring in-person work, including in health care, child- and elder-care, hotels, restaurants, and travel.
In the second are the one-fifth of firms signaling layoffs. These are likely among the pandemic darlings that outperformed during the health crisis as demand surged for goods, technology, finance, and housing. They are being forced to right-size amid higher interest rates and as consumers are shifting their demand to services. These less fortunate areas include broad swaths of the tech sector, finance, real estate, construction, and transportation and warehousing.
Most CEOs fall into the third camp and expect to make no changes to their workforces, as they anticipate a short and shallow recession, and prefer to hoard labor rather than release workers and rehire them at what will likely be a higher cost.
This CEO behavior underscores the difficulty firms face in maintaining a skilled workforce even while staring into the maw of another recession. While they face less difficulty than a year ago, most firms still anticipate at least some difficulty hiring talented workers. Moreover, to both attract and retain talent, chief executives continue to view throwing money at the problem (in the form of higher wages and benefits) as the primary solution to this long-term issue. As raising wages and benefits indefinitely is unsustainable, many firms are turning to automation and digital transformation to fill the gap created by the constrained worker supply.
So, do CEOs’ sentiments regarding recession and the labor force make sense?
Yes. Consumers also fear recession within the next six months but continue to give the labor market relatively high marks according to The Conference Board Consumer Confidence Survey. Additionally, The Conference Board U.S Leading Economic Index has signaled recession in the U.S. starting right about now for more than a year, yet the Current Economic Index remains buoyant due to strong labor market components. Even financial market pricing for Fed rate cuts to commence this year, despite stubborn inflation, suggests that investors expect recession. Nonetheless, that projected easing is comparatively minor, pointing to a short and shallow recession facilitated by continued labor shortage-related tightness in the labor market.