Skip to Main Content
Speaking of the Economy
Looking ahead at business expectations for 2023
Speaking of the Economy
April 12, 2023

Business Expectations for 2023

Audience: General Public

Jason Kosakow and Sonya Waddell discuss the expectations of regional and national business leaders about the economy, based on responses to the CFO Survey and the Federal Reserve Bank of Richmond's regional business surveys during the first quarter of 2023. Kosakow is the Richmond Fed's survey director and Waddell is a vice president and economist who oversees the regional and community development research team.



Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer for the Richmond Fed. My guests today are Jason Kosakow, the Richmond Fed's survey director, and Sonya Waddell, vice president and an economist at the Richmond Fed who manages our regional and community analysis team. Jason and Sonya, welcome back to the show.

Sonya Waddell: Thanks, Tim.

Waddell and Jason Kosakow: Always great to be here.

Sablik: Today, we're going to be talking about [the] business outlook for this year through the lens of some recent surveys. We've now made it through the first quarter of 2023, but I'd say there's still a tremendous amount of uncertainty out there about what this year holds, particularly in light of the recent banking troubles that we've seen in the month of March. People are still asking, is there going to be a recession? If so, how bad will it be?

Sonya, let's start with you. What are you hearing from businesses in [the Fifth] District?

Waddell: I think you're right, Tim. There's still a lot of uncertainty out there. Businesses in the District have been indicating softening in economic activity for quite a few months.

In manufacturing, most firms have been reporting lower shipments and particularly lower new orders since the middle of last year. Outside of manufacturing, indexes such as those for revenues and demand have also indicated softer conditions since the middle of last year, but to a lesser extent than manufacturing and it seems to be more industry specific. For example, while reports from firms focused in residential real estate or some other construction activity have worsened, reports from firms such as hotels or those involved in travel have actually held up.

I'll say two things about the firms that are indicating a slowdown, though. The first is that our regular monthly indexes provide information on how activity for regional firms has changed in the last month, such as how many firms are reporting reduced demand in the last month. However, in conversations with firms, we find that many still see demand for their goods and services above where it was in 2019, particularly in manufacturing. Many are reporting a slowdown from the extraordinary strength that they saw in 2021 and in the first half of 2022.

The other thing is, so far, we've not seen as consistent reports of slowing as we did in the fall of 2008 or in March/April of 2020. In other words, our indexes have not been anywhere near as low as they were in those periods. What's more, our employment indicators remain generally above 0, with continued historically high wage indicators and overall difficulty finding workers with the necessary skills. All of this is consistent with the national data that indicates continued employment growth, a persistently low unemployment rate, and a job openings rate that remains very high, albeit below its peak last year.

Kosakow: To add context to what Sonya said, from talking with businesses and looking at many months of survey data, it seems that businesses aren't really sure if we will face a recession.

When we added questions in our February survey to gauge if businesses were making contingency plans for an economic downturn, about half of firms reported that they were. It varied a little bit by industry — for example, professional services were more likely to be making these plans, whereas firms in retail, accommodations and food services were less likely. But for the most part, a slight majority of firms were preparing for some form of an economic downturn.

On the other hand, about 80 percent of those firms expected any downturn to be moderate. To give a real example, I was talking with a beer manufacturer in Virginia. Coming into 2023, he was very pessimistic about the overall economy and not really sure how his business would do. But as the first quarter progressed, he revised his expectation because consumers are still spending [and] the general sentiment in the community is pretty positive. So, he's not necessarily positive about this year, but he's more so than he was coming into this year.

Sablik: Sticking with the theme of surveys, you also recently got the first quarter results of the CFO Survey, which covers a national group of business leaders. How do those results compared to what you're hearing from regional businesses?

Waddell: For the most part, the surveys are consistent. Let me describe a little bit of what we found in the CFO Survey, and then I can describe how that's similar to the regional surveys.

CFO optimism about the U.S. economy rose in the first quarter but still remained below the historic average. This was true in expectations for GDP growth, too. Although CFOs revised up their expectations for real GDP growth for the first time in almost two years, those expectations were still below what we were seeing prior to the middle of 2022.

In terms of how firms feel about their own business, the results were a little bit mixed. Optimism rose but only slightly. The mean revenue growth expectation rose while cost growth expectations fell, so that was positive. But expectations for employment growth in 2023 were actually below those from last quarter. In addition, even though still only about a quarter of firms reported decreasing spending in the last three months, that was more than about 18 percent that reported decreasing spending in the third and the fourth quarters. So, we saw an increase in the share of firms that were reporting spending decreases.

This is similar to what we find in our monthly regional surveys. Labor availability and cost pressures have been major issues for businesses in both surveys. The monthly survey is showing some easing in finding workers with the right skills, but when talking to local businesses we still hear about it pretty regularly. Our surveys also show that most firms are still spending on equipment or software and investing in their businesses. But some of that, in some indicators, could be slowing. This lines up with the results of the CFO Survey.

Sablik: What else about the results of the CFO Survey have changed from the end of last year?

Waddell: There were a few other changes probably worth pointing out. The first is around prices.

In the CFO Survey, we asked firms to describe their expectations for changes in the current year and in the next year. This means that we've been asking about price and cost change expectations for 2023 since the beginning of 2022. We found that, thankfully, the average expectation for price and cost growth has been generally edging down, albeit in a somewhat bumpy way. Although price growth expectations are still elevated — expected to be around 5 percent in 2023 — they're lower than they were this time last year. The same goes for cost growth.

The second is around some questions that we ask only twice a year about expected capital investment. The results are written up by Zach Edwards and Brent Meyer and posted to our CFO [Survey website], so I encourage all listeners to go and read those.

Let me summarize a few key points. First, there wasn't a ton of change, although there was still some pullback in the share of firms that report planning to invest in structures or equipment and software.

For those not engaging in capital investment, there was a marked increase in the share of firms responding that they were not investing because of an unfavorable financing environment. Admittedly, that was still not the most common reason to not invest. Firms were more likely to respond that they were not needing to expand capacity or, to a lesser extent, that they needed to preserve cash. But at least some percentage of firms have been affected by changes in the financing environment.

Sablik: Another interesting thing that I took out of the surveys, particularly the regional business surveys, is that business leaders seem more optimistic about their own future than the outlook for the U.S. economy as a whole. Jason, how do you explain that difference?

Kosakow: This is something that's pretty common, not just in surveys but how we as humans view the world. It's something called optimism bias, which is the idea that we believe we're less likely to experience a negative event than others.

Putting this into context for our surveys, business leaders are more optimistic about their own firm than for the U.S. economy as a whole. That's because, as a business leader, you have insights into the strategy that you might have for an upcoming downturn. You believe that your strategy might be better than others and have more confidence, so that leads you to believe that you might be a little bit better off than other firms.

A lot of this is built off from asymmetries of information. You probably don't know as a business leader what other firms are doing, especially outside of your industry. But if you're watching the news, you see a lot of talk about a possible recession and economic downturn. So, you feel that the economy is getting worse, but you might not necessarily see that in your business and you believe that the contingency plans you are making is working. This leads firms to believe that they're going to do a little bit better than the economy as a whole.

As we wrote about in a recent Regional Matters post, our February monthly survey indicated that about 20 percent of firms were pessimistic for their own firm while 51 percent were pessimistic about the U.S. economy. For years, the CFO Survey has shown that firms are more likely to be optimistic for their own firm than for the U.S economy as well.

Sablik: Talking about contingency plans, do you know what firms are doing to prepare for a potential downturn?

Kosakow: We asked firms in February what contingency plans they were making. Firms are most likely to be cutting back on discretionary spending. Spending on equipment or software and capital spending were all things that were on the chopping block and were most cited.

Manufacturers mentioned reducing the amount of inventory they are carrying, which makes sense. If you expect softening demand, you'd likely don't need as much inventory. That can help keep costs under control, especially in the short run.

Very few firms reported plans that have reduced headcount. But if you take a step back and think about it, it totally makes sense. For the past two years, the overwhelming barrier reported by firms was finding quality workers, especially workers with the right skills. It doesn't matter what industry, no business could find workers that they needed at the time. Firms invested a lot of time and money in hiring, so they might be a little bit hesitant to lay off workers unless they absolutely have to. For example, a cabinet manufacturer told me that they're slowing down on hiring, but plan to reduce headcounts only gradually through natural attrition. It feels like businesses are scared to be in a position where they were last year, unable to fill demand because they couldn't find the right workers.

Waddell: Yeah, I agree with everything that Jason said, and we'll also take us back to that tight labor market. Many firms still report difficulty finding workers, the job openings rate remains very elevated, and the unemployment rate is extremely low. Perhaps we'll see that job openings rate continue to decline over time without seeing a rise in unemployment.

Of course, cutting discretionary spending is a very common first step for firms. I should also note, though, that many of the firms that we might think of in the discretionary spending space, like marketing or advertising or training, are not reporting sharp declines in their business right now.

Sablik: What will you both be looking out for in the next business surveys, and are you planning to add any special questions?

Waddell: We haven't talked a lot about price changes yet. Inflation — [as measured] by the Consumer Price Index or the Producer Price Index — is coming down, but it remains uncomfortably high. So, we'll continue to ask questions that will enable us to keep an eye on how firms in our District are thinking about both aggregate inflation and changes in their own prices. Of course, firms are most likely to increase prices more when their costs increase more, so we'll be keeping an eye on how firms are expecting their costs, including wages, to move, too.

Also, we'll continue to gauge the level and direction of real economic activity. Are firms seeing or expecting large declines or increases in new orders or demand for services? Are firms finding it easier to find workers with the skills that they need? What might this mean for how we expect the job openings rate or the unemployment rate to evolve?

Kosakow: We always have special questions planned, as Sonya mentioned, questions on inflation. Depending on how it all evolves, we might try to ascertain any impact of recent banking developments on Fifth District businesses.

As you can imagine, we're especially focused on prices. We just published a Regional Matters post on March 28 about how businesses in our District have changed their pricing behaviors. There's a really interesting finding that shows firms have significantly increased the number of times they have adjusted their prices compared to before the pandemic. We definitely want to know more about that.

But in the end, our special questions will depend on what we need to know about the economy as it evolves.

Sablik: Jason and Sonya, thanks very much for joining me today to give this update.

Waddell: Thanks for having us, Tim.

Kosakow: Thank you.

Sablik: As always, listeners who want to stay up to date on the surveys and other data can head over to our website, And if you enjoyed this podcast, please consider leaving us a rating and review on your favorite podcast app.