Chiefs of Finance are Optimistic About the Potential for a Short Recession, however, Challenges Remain

As we start the new year, finance chiefs are facing a variety of challenges such as rising interest rates and inflation, as well as dealing with labor disruptions, pricing, and inventory requirements. In spite of this, many people are cautiously optimistic about the future. 

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There are some pockets in the economy that are weak and highly indebted companies that may face financing difficulties in the current economic environment and default risks, but Trade Algo expressed the belief that healthy companies should be able to survive any headwinds.

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 Carmine Di Sibio, global chairman of Ernst & Young's Big Four accounting firm Ernst & Young, told Trade Algo that all of his clients have been preparing for a downturn in the economy. "However, there are more and more people who believe that any downturn will be short and shallow, to be honest and that it won't last long. The fact that that seems to be taking over, you know, what was a very negative outlook a few months ago, seems to be taking over today."

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During the Journal's biannual summit, chief financial officers, attorneys, rule makers, and other leaders had the opportunity to discuss these and other issues. These are some highlights from the conference, which was held in person in New York for the first time since the pandemic began.

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President John Williams, the President of the Federal Reserve Bank of New York, opened the day's discussion by saying that the economy will require higher borrowing costs for a few years in order to slow inflation and prevent price pressures from becoming stronger in the coming years. Executives are largely optimistic that any downturn will be brief.

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The Federal Reserve has continued to hike interest rates this year, though at a somewhat slower pace than in recent years. Rates have risen by a quarter-percentage point this month to a range between 4.5% and 4.75%, a quarter point higher than the previous month.

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Mr. Williams said that a sufficiently restrictive stance on rates must be maintained for a few years to achieve inflation of 2%.” 

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There is a general expectation among Fed officials that rates will reach 5% to 5.5% this year.

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Meanwhile, there is no shortage of finance chiefs who are finding opportunities to expand in the current volatile economic environment. Academy Sports & Outdoors Inc.'s chief financial officer Michael Mullican told analysts in December that the company planned to open between 80 and 100 new stores by the end of 2026.

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It is likely landlords will offer better terms to retailers as they shutter locations, according to the CFO on Wednesday. “It hasn't happened yet, but I am sure it will," he said. “We may be able to find some availability at a few large retailers. 

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In addition, Mr. Mullican said, the costs associated with expansion, such as expenses for materials including steel, and construction backlogs, are stabilizing, which is good news for his company. He added that inventory challenges are improving at the same time, with the retailer having more control over the goods that are being sold than before. 

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“There has been a significant change in the dynamic. As a matter of fact, if we got it last year, we took it and sold it," he said. “The inventory can now be pushed back. It isn't possible to take everything that your vendors send you."

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Labor woes persist 

Finance chiefs continue to face challenges when it comes to hiring, however. Employers in the United States added 517,000 jobs in January, which pushed the unemployment rate to 3.4%, a more than five-decade low, accelerating job growth at the start of the year. 

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During the last time the unemployment rate was 3.4%, the Beatles 'White Album' sold the most albums, according to Billboard. "This has been going on for over 50 years." 

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According to Mr. Mullican, Academy is looking to remain competitive with hourly rates for its workers in its stores in the future and to offer opportunities to grow in its corporate roles as well. Aside from seeing benefits from recent layoffs that have engulfed companies around the world, particularly those in the technology sector, such as Microsoft Corp. and Alphabet Inc., the parent company of Google, the Katy, Texas-based retailer has also seen benefits from recent layoffs.

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“There have been some challenges getting people to Katy from Houston, which is a neighboring city to Katy. I believe they are looking for an office in Austin, somewhere along the West Coast, or, frankly, somewhere around [New York City]. With all the layoffs we've had lately, we've had quite a bit of success with that type of rate." 

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Mr. Mullican said, however, that hiring remains a hard task, and he doesn't believe it will get easier in the near future.

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"People tend to think, 'Oh, there's going to be layoffs here and there,' but at the same time it is still difficult to attract tech talent," EY's Mr. Di Sibio said. “The labor market is unreal,” he continued, noting that "the tightness of the labor market, I think, will continue for some time to come."  

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Difficulties with capital raising

As the Federal Reserve continues to raise interest rates, some companies are also having difficulty raising capital, in part for acquisitions, as they are struggling to raise capital. Paloma San Valentin, head of the North American corporate finance group at rating firm Moody's Investors Service, told the Financial Times in an interview that although investment-grade companies are likely to weather a slowing economy, lower-rated businesses are in particular danger.

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“Most of the concerns we have relate to companies with bloated balance sheets and substantial debt loads, which are at the lower end of the rating scale,” said San Valentin, referring to companies with high debt loads.

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According to Michal Katz, head of investment and corporate banking at Mizuho Americas, a major investment bank in the United States, capital-intensive companies will also face a tougher environment when it comes to raising capital, but the situation varies from company to company.

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Ms. Katz said that businesses are increasingly relying on private credit to finance large-scale transactions instead of mid-sized ones, due to these challenges.

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The Chief Financial Officer of Cart.com Inc., a software company specializing in e-commerce transactions, said that the company is actively looking for acquisitions, but funding for deals is hard to come by. In his view, he said that there is no point in buying anything that is going to result in a negative cash flow

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As Mr. Parker pointed out, some companies will likely strike deals out of necessity as a result of market conditions. It is going to happen that companies are going to merge because, from a cost structure perspective, they simply don't make sense to be standalone companies," he stated. 

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Climate disclosures expanded

There has been controversy surrounding the Securities and Exchange Commission's proposal to expand the disclosure of climate-related information by public companies, even within the agency itself. According to Kelly Gibson, former leader of the SEC's enforcement division's climate and environmental, social, and governance task force, it is possible that the commission will back off somewhat, particularly on its proposed Scope 3 requirement requiring some companies to provide disclosures on emissions from up and down their supply chains.

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“Among the most contentious aspects of the proposal is Scope 3, which I believe is going to be the most challenging for companies to work through,” said Gibson, who now works for Morgan Lewis & Bockius LLP, a law firm. “It might be a good idea for the commission to dial it back a little bit."

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“Activists have been propelled by an extraordinarily aggressive market with many of them seeing opportunities to invest in sectors and companies where they have never had the opportunity before,” she said.

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“Activism has increased over 40% in the United States over the past year,” Deignan added.

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In order for activists to make a difference, they are looking for good assets, an undervalued company, and a chance to push for a board seat, which could mean making a bid for a board seat. It is vital for finance chiefs who wish to avoid being targeted by activists to be aware of the types of issues that matter to shareholders, such as the kinds of capital allocation strategies they think are good and whether they have good access to management, Ms. Deignan advised. 

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“All you have to do is do everything right,” she jokingly said.