Discussions about the possibility of a recession are becoming less common among American business leaders. Since the Federal Reserve began raising interest rates in early 2022, corporations and investors have been bracing for how a recession might develop. The topic is now losing its appeal in the earnings reports of major US companies as it becomes increasingly likely that inflation has been cooled without triggering an economic downturn. The word “recession” appeared in the fourth-quarter earnings reports of 47 companies in the S&P 500 Index, the weakest since the end of 2021, according to market data platform FactSet. Another way to look at it: Compared to the same three-month period a year ago, the word was mentioned in less than a third of all calls. And despite a period fraught with economic challenges, the fourth-quarter numbers were below the five- and 10-year averages of 85 and 61, respectively. Sweet Talk When talk of a recession did begin, the tune was often sweeter. Executives noted an improvement in the macroeconomic environment compared to what they saw in previous quarters. “Everyone seems to be more optimistic this year compared to last year,” said John Wall, chief financial officer of technology company Cadence Design Systems. “This time last year everyone was asking me, ‘When is the recession going to happen?’ Gross domestic product grew 3.2% in the final quarter of 2023. , a measure of all goods and services has clearly shown that the economy is shirking the recession once thought almost inevitable. Wall Cadence is not alone in his confidence. Nearly half of the more than two dozen financial executives surveyed by CNBC said they expect the Federal Reserve to control inflation without a recession, a scenario known as a soft landing. Another nearly 15% of respondents to the CNBC CFO Council survey said they believe a recession has already occurred. The improved sentiment comes after nearly three out of every four companies beat Wall Street expectations in the latest quarter, according to FactSet. One of them was commercial real estate developer CBRE, which beat analysts’ consensus estimates on both earnings and revenue in the fourth quarter. Looking ahead to 2024, Chief Financial Officer Emma Giamartino said the Dallas-based company’s full-year outlook is “dependent” on the Fed cutting short-term interest rates and the economy avoiding a recession. For the full year, CBRE expects core earnings per share to be between $4.25 and $4.65. But Giamartino said much more than usual would happen in the second half of the year, coinciding with when the central bank is expected to start cutting interest rates. Focus on the consumer Consumer-facing businesses have been monitoring their customers’ behavior in recent years for signs of weakness as inflation has taken a toll on wallets. Costco Wholesale Club officials said the store’s Kirkland Signature brand grew in popularity as shoppers prioritized value amid rising prices. But chief financial officer Richard Galanti said the downward trend in trading was short-lived. “People, in my opinion, have switched gears a little bit,” Galanti told analysts earlier this month. “But the situation has changed. We don’t see that anymore.” Extra Space Storage said demand has continued as customers change living arrangements, especially with 30-year mortgage rates hovering around 7%. Nearly half of storage users said they receive units when moving from one apartment to another, according to CEO Joseph Margolis. “The housing market will certainly help, but it’s not the only driver of self-storage demand,” Margolis said on a call with analysts at the Salt Lake City-based company late last month. “More transitions are just good.” Extra Space is cautious about cutting interest rates too soon. In forecasting future financial performance, the company does not expect levels to decline in time to stimulate the summer housing market. Still, Margolis acknowledged that avoiding an economic downturn is good for business. Extra Space was one of 37 S&P 500 companies to use the term “soft landing” during fourth-quarter earnings reports, the highest level in at least three years, according to FactSet data. “A strong economy is always better than a weak one,” Margolis said. “Everything now points to a soft landing rather than a recession.” Improving deal conditions After higher interest rates led to a sharp decline in mergers and acquisitions, executives are wondering whether 2024 could mark a rebound in deal volume if borrowing costs fall. Host Hotels said the transaction market could benefit as improved macroeconomic sentiment would lead to greater transparency on operating performance. The upscale hotel investor said that with total liquidity of $2.9 billion, it is well positioned to make acquisitions. This view is shared across all sectors, from real estate to technology. For example, asphalt and concrete producer Vulcan Materials, whose management called 2024 a year of “catch-up” development in the industry, is also expecting new deals. “While 2023 was pretty quiet and there were a lot of unknowns, I think 2024 will be very busy,” CEO J. Thomas Hill said of the M&A environment. “I expect we will get some deals across the finish line.” ‘Difficult to predict’ Of course, some executives are less confident that they will have a stronger year, even if a recession has been avoided. Lowe’s CEO Marvin Ellison said it’s “still very difficult to predict” when demand for home improvement products will increase. While rising expectations for a soft landing are cause for optimism, he said it is unclear how long it will take for consumers to change their spending habits even after interest rates begin to fall. The decline in home sales remains a cause for concern, Ellison said. Mortgage borrowing levels are still too high to entice those locked into lower rates to move, which is usually a natural catalyst for home improvement spending, he said. The North Carolina-based retailer also suffered as Americans chose to spend money on travel, football games or concerts rather than on merchandise in the wake of the pandemic, the CEO said. “The consumer is financially healthy, but in this post-pandemic period, customers still prioritize spending on services,” Ellison told analysts late last month. “While we expect these trends to normalize, the timing remains uncertain.”
