Fifth District Firms Report Cautious Optimism Going Into 2023
The COVID-19 pandemic and its aftermath have required constant shifts in how businesses operate. Not surprisingly, uncertainty has been a theme among many firms in the Federal Reserve Bank of Richmond's business outreach in the last few years. To better understand what firms are expecting for 2023, we asked them for their outlook and the strategies they might take to prepare for possible economic scenarios.
Firms Are Generally Optimistic About Their Own Prospects But More Pessimistic About U.S. Economy
To better understand business sentiment, we asked firms to rate their optimism about both the U.S. economy and their own-firm prospects. Understanding business sentiment can provide information on how firms might be investing or planning for the future, which will affect future economic conditions. Negative sentiment, for example, might be self-fulfilling, contributing to real declines in future economic activity.
Fifth District firms are generally optimistic about their own prospects in 2023: More than half of responding firms indicated that they were either somewhat or very optimistic, compared to 20 percent of firms that were somewhat or very pessimistic. Business optimism varied by industry: Two-thirds of responding firms in retail, accommodations, and food services were optimistic about their own prospects in 2023 compared to, for example, just over 40 percent of manufacturers.
When asked about the overall U.S. economy, firms were much more pessimistic. Half of Fifth District firms were pessimistic about the outlook for the U.S. economy in 2023, compared to about a quarter that were optimistic. It is common for firms to be more optimistic about their own prospects than about the economy as a whole. The difference in own-firm optimism and the overall U.S. economic optimism is similar to what we find in The CFO Survey.
Fifth District Firms Are Hoping for the Best But Planning for the Worst
A majority (61 percent) of firms in our sample — regardless of their level of optimism — are making contingency plans for their business. Just over half of firms are making business contingency plans for an economic downturn, whereas 7 percent are making plans for an upturn, and 39 percent are not making any plans. Contingency planning for an economic downturn is consistent across industries, although there were some small differences: For example, professional services and manufacturing firms were the most likely to have made contingency plans for an economic downturn.
Sentiment about the U.S. economy is connected to if contingency plans are being made, and for the expected economic scenario. For example, being pessimistic about the U.S. economy is connected to preparing for an economic downturn. Seven in 10 Fifth District firms that are pessimistic about the U.S. economy are making contingency plans for an economic downturn, compared to three in 10 firms that are optimistic about the U.S. economy and are making plans for an economic downturn.
Although preparing for an economic downturn, firms pessimistic about the 2023 U.S. economy generally do not expect a downturn to be severe. Of the pessimistic firms making plans for an economic downturn, most (79 percent) are planning for a moderate (not severe) downturn. These firms are split on if the downturn will be temporary or persistent.
Firms' Contingency Plans Focus on Curbing Spending
Firms' contingency plans — regardless of optimism levels for the 2023 U.S. economy — were focused on cutting spending. Among firms that were making plans for an economic downturn, nearly all were reducing their discretionary spending, three in four were canceling or delaying purchases, and two in three were canceling or delaying capital expenditures. Meanwhile, only about four in 10 were planning to reduce headcount. Our monthly survey responses have indicated that in the last few years, firms have struggled to find the workers they need. Possibly, firms are looking to hold on to the workers that they spent considerable time and resources hiring.
Conclusion
Fifth District firms remain generally optimistic about their own-firm prospects, although they are less optimistic about the trajectory of the U.S. economy in 2023. Nonetheless, many firms, especially those that are pessimistic about the overall economy, are making contingency plans for an economic downturn. These actions include reducing discretionary spending and delaying purchases or capital expenditures. As 2023 unfolds, the Richmond Fed will continue to monitor business expectations and assess how those expectations are impacting our region's economy.
