- Top CEOs including Goldman Sachs’ David Solomon talked about the recession at the CNBC CEO summit this week, with the banker saying that inflation will continue and that a “shallow” recession could come.
- But CEOs from metals to logistics to Wall Street have said if a recession occurs it will be different than in the past, and not just because of the job market.
- Infrastructure legislation and the Inflation Control Act result in a level of heavy industry investment that defies the typical economic downturn.
The CEO of bond investment giant TCW Group, Katie Koch, heard what she wanted to hear at the CNBC CEO Summit this week. It wasn’t good news, but it matched her view of where the economy was headed. Koch, who described herself as walking into the CEO meeting “in the mid-to-hard landing camp,” said she was surprised by recent events such as the Milken Global Conference, where she said CEOs were, in her view, “too happy.” “
“CEOs are definitely more negative,” she said of the conversations she had at the CNBC CEO meeting, “and I think that’s a really, really important data point. …people are seeing a real degradation, revenues are muted and job losses will take a toll on the economy.”
At the same time, she mentioned a “major call for global liquidity”, which will put additional pressure on the economy and the labor market, which is “starting to collapse”.
This is a view that, if not shared meticulously memo by memo by the CEOs at the CNBC CEO Summit’s economics panel, encompasses many of the well-known downside arguments that surfaced in an on-stage conversation between Wall Street CEOs to the steel industry and the logistics sector.
While Goldman Sachs’ economic research team still believes a soft landing is possible for the economy, and Goldman CEO David Solomon has told other CEOs it’s “difficult to have a full-employment recession,” he added that his own conversations with CEOs reinforce the view that economic conditions are tightening and it has “leg effects”.
On Wednesday, the latest release of the Fed Minutes showed top central bank officials were divided over the next interest rate change, but showing a tilt towards less aggressive policy.
Goldman’s CEO is registered as having no specific call for or against a recession, but said “it’s hard to tighten economic conditions and have inflation without affecting growth and some rebalancing of influence.”
Should a recession occur, Solomon says he is willing to make one prediction: it will be “shallow”.
But Solomon, like other CEOs, said there is another ambiguity in the current economy that will make whatever happens next deviate from the economics textbook.
Tamara Lundgren, CEO of Schnitzer Steel, there are two competing forces in the economy that can be seen in the demand for metals. On the one hand, the central bank aims to slow down the global economy, but the commodities industry has also adapted in the long term to what it described as “two remarkable industrialization transitions.”
One of them is the transition to a low-carbon economy, which requires huge amounts of metals and minerals, as indicated by copper for electrification. “We rarely see this set against high inflation and tightening credit conditions and central banks’ drive to slow growth,” Lundgren said.
The second she mentioned is the development of generative artificial intelligence, which will have an impact on economic production and worker productivity.
In recent trading, metals led by copper have been engulfed in a signal of concern about the global economy and the dynamics of China’s recovery, but this comes on the back of a long-term belief that developments including electric vehicles in the automotive industry will keep metal prices on an upward trajectory .
“Structural demand for metals is very important,” said Lundgren, and the current competing forces are contributing to clouding the economic outlook. “With credit tightening we would normally see some impact on construction and we will see this in office, commercial and warehouse construction…
The importance of this structural trend can be seen from the current debt ceiling negotiations to the geopolitical and economic rivalry with China.
China is the world’s largest user of metals, and China’s economic behavior can affect demand, Lundgren said, as it does now, but China’s concentration of control over critical minerals has become apparent to the rest of the world and has led to a focus on metal augmentation and mining in North America.
Citing research by Jeffrey Currie, head of commodities research at Goldman Sachs, she referred to the “revenge of the old economy” and the moment when “decades of underinvestment in mining and metals” became a key problem for the US and other developed economies that need of these materials for low-emission economy infrastructure.
“That’s why allowing reform is now such a big part of the debt ceiling, a big deal between Biden and McCarthy,” Lundgren said.
Earlier this week, Exxon Mobil announced it did entry into domestic lithium mining in Arkansasa key component of the current generation of EV battery chemistry, while Italian energy giant Enel said it would invest more than $1 billion in a solar panel plant in Oklahoma, one of the largest clean energy investments in the US since the IRA was passed.
The latest result from the Congressional Budget Office The clean energy tax break estimates that it could cost at least $180 billion more than originally projected, as the business world’s appetite for related projects is higher than anticipated. Goldman Sachs recently forecast that the provisions of the Inflation Reduction Act could cost as much as $1.2 trillion over the next decade, roughly three times what the government had projected.
Lynn Martin, president of the NYSE, said one area showing continued strength in the tough IPO market is the transition from traditional energy to clean energy companies.
The recent downturn at the Dow came as debt ceiling talks stalled this week, but CEOs at CNBC’s CEO meeting were more focused on the bigger economic picture. Recent economic data shows that inflation is leveling off, supply chains are slowing down, production is falling, demand is falling and consumer activity is dropping significantly. The most resilient consumer, the high-end consumer, is cracking, according to comments from Saks CEO Marc Metrick during the CNBC CEO Summit.
“We all see it,” Lundgren said, but added, “you have a second driver, infrastructure funds going through the system … electric vehicles and batteries and solar and wind, long-term structural demand drivers,” she said.
There is a high probability of a recession, but she added: “Whatever this recession is, we may need a new name. I’m not sure history has ever seen that.”
According to Mario Harik, CEO of logistics company XPO, more and more large industrial customers are opening production facilities in North America, but the short-term economic picture is not easy to interpret. Inflation is normalizing, but as a result the Fed has to slow down with interest rate hikes. Wages that grew mid-to-high last year have returned to “pre-pandemic wage increases”, according to Harik, and transport costs have “significantly” fallen, even if they remain above 2021-2022 levels.
Harik said Q1 shipments rose year-on-year despite the economic slowdown, but two-thirds of the industry in North America and Europe saw “slightly less demand than expected.” He said activity picked up slightly in April and retailers still expect growth in the second half of the year. But overall, “very mixed signals,” he said.
Solomon expects inflation to be more sticky than many people think when it peaks – Rival bank CEO Jamie Dimon of JPMorgan Chase said this week the economy should be prepared for interest rates as high as 7% — and Solomon also thinks he might need higher stakes to control him.
Solomon cited “some structural things happening” related to inflation that will make it difficult to get back to the Fed’s “easy” 2% target. Even if the Fed abstains, based on what it sees in the economy now, it said no interest rate cuts should be expected until the end of the year, which dominates the bond market.