The sky is not falling. The air quality is still a bit hazy in many parts of the United States, due largely to the Canadian wildfires burning through the countryside, but economically the second half of 2023 is off to a stable start. And the recession that was on the tip of everyone’s collective mind for the past six months looks more like a worry wart on the end of Americans’ collective nose.
One person who foresaw this months ago was Alex Chausovsky, vice president of analytics and consulting at Miller Resource Group. He explained the economic situation and reassured those in attendance at the Control System Integrators Association (CSIA) Executive Conference in New Orleans.
“Be a data-driven decision-maker in every facet of your business,” Chausovsky advised. “Don’t buy in to the hysteria. We’ve been hearing about a recession for more than a year. Real gross domestic product (GDP) is the most holistic economic indicator in the United States. It remains at a record high. We have not been in a recession so far.” Things are still looking good, but it’s important to drill down, he cautioned.
“We have not ceded ground or lost our leadership hold to China,” he said, citing the chart of the $100 trillion global economy from Visual Capitalist, which denotes America’s reign as the top global economy for more than 150 years. Only 2% of the United States’ $25.3 trillion economy is exports, while almost 10% of China’s $19.9 trillion economy is exports, explained Chausovsky.
“The U.S. dollar is still the global currency,” he assured. “People put trust in the U.S. economic system because we have the rule of law and we have military might.” About 60% of global trade is in U.S. dollars, Chausovsky said.
“We did have a recession in Q1 and Q2 of 2022, but we have been in positive GDP since then,” he explained. “A lot of the elements that fueled retail sales growth, such as the COVID shutdown, are starting to fade, so that growth is not sustainable. Economies do not accelerate forever.”
Chausovsky indicated the U.S. economy is in a controlled descent. “The possibility of a soft landing—a mild recession—is likely,” he said. “By the second half of next year we should be back in a rising trend.”
Successful companies will capitalize on the growth before everyone else knows it’s coming, he explained. “The face value of industrial production is we do not have any evidence of major contraction,” Chausovsky stated. “Our highest level was in 2019, but we’re not declining as of right now. We’re seeing a fairly substantial slowdown in the volume of activity. A lot of you are still busy, but I believe that is backlog.”
While year-over-year activity is still up slightly, Chausovsky expects it to dip into the negative during the second half of 2023 but net around zero for the year compared to 2022.
“Capital-goods new orders fuel the majority of your projects as system integrators,” he noted, reminding the 400-plus attendees of their almost $900 billion record high, mostly due to price increases that have been passed on to customers. “We’re slowing down from a capital-expenditure (CapEx) environment. Remember that you are in business not to grow revenue, but to grow profits.”
Many companies have been slow to increase prices, but now is the time. “As we get closer to a recession in the first half of 2024, it’s going to become more difficult to raise prices,” Chausovsky cautioned. “You’ll get pushback as recession nears.”
Some of the leading indicators cited by Chausovsky included the capacity-utilization rate, which gives a six-month lead time to U.S. production, and price indices. Copper prices, for instance, yield a nine-month lead time and are signaling downward movement. The purchasing managers’ index offers a 12-month lead time, indicating the economy is heading down. However, consumer price index (CPI) and its eight-month lead time shows that we should see inflation continue to abate over the next few months, said Chausovsky.
“The producer price index (PPI) is down 2.3%,” he explained. “We’re down to levels we saw in 2018 and 2019. You’re going to have a tough time increasing prices to your customers because they’re going to point to the PPI.”
The global-supply-chain pressure index is pointing to the further downside pressure of the CPI. “This makes me believe the Fed is done raising interest rates,” said Chausovsky, who’s been correct so far. “We’ll end the year at 5.25%,” he predicted.
“The odds of a recession in the next year about 65%,” explained Chausovsky. “The job market has remained consistent. Businesses have healthy backlogs to carry them through. It’s going to be a mild and brief recession.”
He offered a list of actionable items to weather any tip that does occur:
• Start thinking now of the levers you need to pull. You must track your firm’s business cycle and your leading indicators.
• Optimize cash flow.
• Double down on outperforming sectors and applications. Narrow your focus.
• No win is too small. Whale hunting is important but can’t be your only focus.
• Lower and mid-tier solutions are likely to lead during the downturn. MRO will be increasingly key.
• Invest in buildout of channel and partner ecosystems for collective win-win scenarios.
• Lock in business when possible. Current customers are your best allies and likeliest growth vector.
The labor market will be an important reason why any recession might be mild and short-lived, said Chausovsky.
“In April, we added 253,000 jobs,” he noted. “It’s remarkable how resilient the labor market has been, despite the news of the upcoming recession. We’re going to have a recession with full employment for the first time in U.S. history.”
At the beginning of the summer, the unemployment rate was 3.4%, the lowest since 1969, and it’s remained under 4% through the summer holiday. “The cost of your labor pool will not become cheaper,” explained Chausovsky. “Wages are up 4.4% over the past 12 months and will continue to go up, even during the recession.”
System integrators are included in the professional and business services sector, which had 1.7 million open positions, including almost 700,000 open positions in manufacturing, noted Chausovsky. “The number of unemployed people per opening is 0.63,” he said, recommending development of an effective talent strategy:
• allocate resources to developing and continuously improving a comprehensive talent strategy
• be a data-driven decision-maker
• find partners and allies
• communicate why your company is attractive and understand candidate priorities
• strive for efficiency and top-notch communication in the hiring process
• ask for input, listen and respond to keep your people.
