Uncertainty is never a pleasant state of being, but when was the last time you lived in a certain world? Likely, that ended on your first day in preschool. Your outlook for 2023 depends on your industry and how much you believe the accuracy of mainstream media. We subscribe to multiple economic data sources to help our clients draw their own conclusions. The contradictory information regarding whether we are in a recession confuses many, yet what really matters is what is happening outside your own front door. Your access to obtaining new employees and the state of your supply chain are the most important pieces of data moving into 2023.
Here are some major data points to think about:
- True inflation rate hitting US consumers in 2022 currently is 8.5% and declining slowly. Estimates for inflation in 2023 vary between 4-5% as the Fed targets 2% – but they will have to throttle their actions to avoid causing a recession in late 2023, just before the 2024 election year.
- The current prime rate of 4.75% and will rise this year and next. Estimates of the rise run between 150-200 basis points. Banks are expected to make restrictive changes to their lending practices.
- Consensus GDP growth in 2022 is 2.5-3% and that rate is expected to maintain in 2023. Most major economic forecasters are not projecting a recession in the next 24 months. GDP growth for the second half of 2022 is expected to grow slightly and continue into 2023. The decline in GDP in the first half of 2022 was caused by shortages in goods and employment, NOT DEMAND.
- The tight supply chain is expected to ease in 2023 but it is industry dependent. Companies need to change their just-in-time inventory management to “just in case”.
- The employment market will remain tight for the foreseeable future. Demographic changes are driving that with retirements up and many workers not returning post-pandemic. In 2022, wage increases are averaging around 5% and health care plans are increasing premiums at 9-12%.
- Consumer spending is expected to grow 5-6% in 2022 and slightly less in 2023, mostly driven by inflation. Business capital investment will grow slowly as owners are cautious and equipment is still in short supply. Much of that growth will be in services where inventory is not an issue. In some industries it will be the lack of workers that reduces growth.
In summary, 2023 does not look much different from 2022, except there will be a continuing trend towards normalcy in markets. Inflation is not short-term transitory, and the supply chain has yet to pass-on all cost increases. We recommend having a detailed plan B for 2023 just in case there is more pandemic or political disruption.
We recommend that you plan multiple scenarios and “what if” different assumptions. Define different scenarios based on supply chain changes, possible automation investment in lieu of people, and different ways to growth; either organically or through acquisition.
We also recommend building a financial forecast model to test these “what if” assumptions against different scenarios. This creates confidence and resilience, since having tested the impact of various assumptions allows you to risk-rate alternative actions and set your expectations on how much risk fits your confidence levels. Business owners can handle uncertainty more effectively if they have defined paths and foresee tipping points to move from one plan to another. In addition, if this multi-scenario strategy becomes understood throughout your team, and the ability to attract and retain top talent is greatly enhanced.
C Squared Solutions provides interim or fractional CFOs, COOs, and CEO advisors in nearly all industries. We analyze and advise on these issues frequently through sophisticated modeling and experienced management. Give us a call or visit our website for more information and details. We have been there and done that!