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Speaking of the Economy
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Speaking of the Economy
June 29, 2022

Prospects for a Recession: A Perspective From the CFO Survey

Audiences: Economists, General Public

Sonya Ravindranath Waddell shares insights from the latest survey of chief financial officers and other financial decision-makers at companies across the United States. Waddell is a vice president and economist at the Richmond Fed.



Tim Sablik: Hello, and welcome to Speaking of the Economy. I'm your host, Tim Sablik, a senior economics writer here at the Richmond Fed. My guest today is Sonya Waddell. Sonya is a vice president and economist who oversees the regional and community development research area here at the Richmond Fed. Sonya, thanks for joining me today.

Waddell: Thanks so much for having me, Tim.

Sablik: Our topic today is one that I think is on many people's minds, which is "What is the likelihood that a recession is on the horizon?" Of course, there's no single indicator that can tell us that a recession is coming. So, economists at the Fed and elsewhere look at a broad range of measures, including surveys of business leaders and market participants.

One of those measures is the CFO Survey. Sonya, you were on the show last year to talk about the survey and we'll put a link up to that episode. But I was wondering if you could start by reminding our listeners how the CFO Survey works and what it measures.

Waddell: Absolutely. The CFO Survey is a joint survey effort with the Federal Reserve Bank of Atlanta and Duke University's Fuqua School of Business. It's a quarterly survey of CFOs and other financial leaders to get their take on economic conditions and their expectations for the future, both for the U.S. economy and for their own firm.

Sablik: Great.

Actually, the second quarter 2022 survey results are going to be released today, the day that this podcast is airing. Maybe you can give us an overview of what the results are. What are business leaders most worried about, and have their concerns and expectations changed since last quarter?

Waddell: Broadly speaking, I'd say that the second quarter results reflect what we're hearing from businesses across the Fifth Federal Reserve District and the country.

Businesses are concerned about the next 12 months in the U.S. economy. The average probability that respondents to the CFO survey put on negative GDP growth in the next four quarters doubled from the last quarter of 2021 to the first quarter of this year, and then doubled again from the first to the second quarter of this year.

With this release, that probability — again, the probability that CFO Survey respondents put on negative GDP growth — was roughly 21 percent. What's more, the entire distribution shifted down. On average, CFOs now anticipate real GDP growth of just 1.5 percent over the next four quarters, much lower than the 2.5 percent expected in the first quarter. In addition, we asked firms to rate their optimism about the U.S. economy on a scale of zero to 100. That index fell from around 60 at the end of 2021 all the way to 50.7 in the second quarter [of 2022]. So, optimism is down.

In the end, Tim, the concerns have not changed. Firms struggle with everything from supply chain difficulties to skilled labor shortages to increasing costs. And all of it is not just increasing costs but uncertainty around what the structure of costs will look like in a week, or a month, or a year that has firms concerned. These concerns have been there for many, many months. Now, of course, there are also concerns about the impact of a rising interest rate environment on customer demand and investment plans.

I will say one thing, though. As concerned as firms are about the economy, their optimism about their own firms' prospects has not fallen nearly as much. In fact, the gap between optimism about the economy and optimism about their own firm widened even further this quarter.

Sablik: That's interesting. That seems to be a mixed message from the survey. It seems that CFOs on the one hand are fairly confident about their own firms' futures but less confident about the future of the overall economy. How do you navigate those different data points when it comes to trying to forecast something like the likelihood of a recession on the horizon?

Waddell: I think it's relevant. I think that it tells us something about the mindset of businesses in the nation.

As I said, the probability that they ascribe to a recession in the next four quarters has gone up notably. Other data, for example, on small business optimism or consumer sentiment corroborates that sense of economic uncertainty that seems to be pervading U.S. households and businesses right now. And when businesses and households are uncertain, they might not engage in the sort of spending and investment that drives broader economic activity.

On the other hand, aggregate demand in the U.S. economy is still reasonably strong, and firms are much more confident about their own firms' prospects. So, even if things like inflation, rising interest rates, and global tensions might make respondents nervous about the U.S. economy, they are at the very least less nervous about their own business. There's more evidence of this in the survey, such as the reasonably strong nominal revenue growth and anticipated employment growth in 2022 and even more in 2023.

There's one other thing we asked about this quarter that I thought was interesting. Although it might not give us information on the likelihood of recession, it does let us know the impact that rising rates might have on capital investment. This quarter, we added some questions on how an increase in a firm's borrowing rate might affect their capital investment. Although very few firms reported much change in borrowing or investment in response to a one-percentage-point increase, by the time we got to three percentage points, two thirds of borrowing firms indicated that they would reduce their capital spending plans and nearly 40 percent said that they would shrink their plans significantly.

So again, although aggregate demand is still reasonably strong, there are certainly headwinds on the horizon.

Sablik: Yeah, no doubt. That last question is definitely relevant given the Fed's current policy trajectory. How does this information factor into the decisions that Fed policymakers make?

Waddell: It definitely factors in. It's easiest for me to talk about how it factors into the monetary policy decisions and deliberations of the Richmond Fed President Tom Barkin. I can tell you that these survey results are a big part of the intelligence that we provide to him, in addition to our own Fifth District business surveys and the conversations that both Tom and other Richmond Fed staff have with a wide array of businesses.

The data that we get from other sources such as GDP or employment is always lagged. So, the CFO Survey is an incredibly valuable source of information on what's happening on the ground right now, which we could use to better predict where the economy might be headed. In addition, the information from financial leaders provides policymakers context for other data.

The CFO Survey and other business intelligence gathering is a source of valuable information that many Fed policymakers rely on. I know Tom certainly does.

Sablik: Is there anything in particular that you'll be watching for with the next quarter's release of the CFO Survey, which will happen in September?

Waddell: I think there are some key questions on the minds of economists and policymakers right now that this survey can shed light on, namely, "How is demand evolving? Is inflation abating?"

To that end, in the third quarter survey I'll be watching for three things. First, do we see a continued shift down of GDP growth expectations? That will provide insight into the probability that businesses put on a recession? Second, is there any indication that demand is, in fact, slowing, and perhaps that firms can finally meet their demand with supply, which is something that they've been struggling with for about a year? Third, is there any indication that firms are anticipating price growth to abate? That last one will be important to ensuring that inflation is coming back into better territory.

Sablik: Right. Definitely for any of our listeners who also want to stay up to date on the CFO Survey and any other data releases from the Richmond Fed, you can head over to our website to sign up for email alerts when those go live. We'll also include a link to this current edition of the CFO Survey in the show notes here.

That's all we have for today. Sonya, thanks very much for joining me to talk through that.

Waddell: Thanks so much for the opportunity, Tim.

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