Tag: recession

Snap investors, do you still trust Evan Spiegel?

When Snap Inc. went public in 2017, this column boiled down the entire investment opportunity to one, simple question: Do you trust Evan Spiegel?

As Snap
SNAP,
-0.64%
stock heads toward its lowest prices since March 2020, and potentially even lower, that question is even more important, and answering “yes” should be even harder.

Three months ago, amid the beginning of a huge slowdown in the ad business, Snap initiated a unique dividend meant to ensure that the founders maintained control of the company, even if they sold their stock — protecting themselves. Then in August, news came that Snap was laying off one in five employees. As Snap again reported disappointing results Thursday and saw the stock plunge again, the company decided now was the time to initiate a stock buyback plan, promising to spend up to $500 million to offset the dilution from employee stock plans — in the past nine months, Snap has spent $937 million on stock-based compensation.

On the face of it, this seems like an investor-friendly approach — Barron’s pointed out earlier this year that investors were suffering while employees were faring better with the hefty stock-comp plans. But it’s also worth pointing out who the biggest investors in Snap are: Spiegel and his co-founder Bobby Murphy.

As the company’s largest individual shareholders, Spiegel and Murphy are among the key beneficiaries of Snap’s plans to buy back stock, which usually leads to a boost in the stock price. Those two still control over 99% of the voting power of the company’s capital stock, and as the parent of Snapchat reminded investors in its annual report, “Mr. Spiegel alone can exercise voting control over a majority of our outstanding capital stock.”

Shares of Snap tumbled an additional 25% to just under $8 in after-hours trading, putting them near the lowest prices since March 2020. On Thursday, the company ended regular trading hours with a market capitalization of around $17.91 billion, but that was headed toward $13 billion with the after-hours collapse.

Besides protecting themselves and their investment, Snap’s executives have shown little ability to head off big issues, nor offer any worthwhile solutions to the current ad downturn. In the third quarter, its revenue grew a paltry 6%, down from the most recent second-quarter revenue growth of 13%. Snap appears to be in a steady revenue slowdown, from its peak growth of 116% in the June 2021 quarter.

Snap has blamed both privacy changes that Apple Inc.
AAPL,
-0.33%
made to the iPhone that affected ad tracking, and more recently, the macroeconomic advertising climate, while avoiding one of the biggest factors — the rise of TikTok. Top executives didn’t seem to see any of those challenges coming early enough, and did not do enough about them once they did.

“The company was slow to react — or acknowledge — the significant headwinds faced by privacy initiatives, compounded by competition, and more recently macro headwinds,” Colin Sebastian, an analyst at Baird Equity Research, wrote in a note.

The competition factor, mostly from China’s TikTok, was addressed briefly on the company’s call with analysts, but was not really acknowledged by Snap leaders.

“We believe that the differentiated nature of our service is what’s contributing to the daily active-user growth, which grew 19% year-over-year to 363 million daily active users,” Spiegel said. “In terms of the content specifically, I think there’s a lot of headroom, of course, to continue to grow content engagement.”

In the company’s shareholder letter, Spiegel acknowledged that the results were “far from our aspirations,” and that Snap would use this time of reduced demand “to pull forward and accelerate changes to our advertising platform and auction dynamics that we believe will deliver better results for our advertising partner.”

Spiegel is known for going by his own instincts and not listening to other executives, employees or even market forces, as was noted in a Wall Street Journal report that detailed his push for an unsuccessful product redesign in 2018. While the company appeared to have snapped back from that debacle last year, it is now facing a fiercer rival for young people on social media in the form of TikTok.

Investors who still have patience to wait and see if this stock ever recovers will also have to stick around with Spiegel — and as our IPO column noted — Snap is unapologetically founder-controlled. No change at the top can ever come unless it is initiated by Spiegel himself. Investors have to make a leap of faith that Spiegel can turn things around, but they need to remember that Spiegel usually thinks about himself first.

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October 20, 2022
The Fed isn’t about to back down from its inflation fight | CNN Business
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

London
CNN Business
—

Twelve days from now, the Federal Reserve will meet again, and expectations for the central bank’s next moves are firming up. The consensus among investors: Persistently hot inflation means the Fed will need to continue with its string of aggressive interest rate hikes, which is unprecedented in the modern era.

What’s happening: Markets see a 99% probability that rates will rise by another three-quarters of a percentage point, reaching a range of 3.75% to 4%.

A hike of that magnitude is now “a given,” Quincy Krosby, chief global strategist for LPL Financial, told clients on Wednesday. “Concern is now focused on December, and whether the Fed is prepared to transition to smaller rate hikes.”

That’s up from a 60% probability one month ago. So what changed?

Inflation, mainly. The US Consumer Price Index rose 8.2% in the year to September after rising 8.3% annually in August. While CPI peaked at 9.1% in June, that reading was still uncomfortably elevated and higher than economists had expected.

The 6.6% annual uptick in shelter costs was of particular concern. It takes longer for housing expenses to come back down than some other categories, since renters tend to sign leases for 12-month periods. The monthly rise in core services costs (excluding energy) was the largest gain in three decades.

The data underscored the need for the Federal Reserve to stay tough — while a strong jobs report for September will deliver confidence the central bank can do so without causing undue harm to the US economy.

Fed officials have said as much. In an interview with Reuters on Friday, St. Louis Fed President James Bullard said inflation had become “pernicious,” which means that “frontloading” larger rate hikes is logical.

The market impact: The S&P 500 kicked off the week with a 3.8% rally before dropping 0.7% on Wednesday. It’s still plodding along in a bear market, about 23% below its January peak. So long as the Fed signals its intention to keep the pressure on, boosting the odds of a US recession, volatility is expected to persist.

Even relatively solid corporate earnings may not be sufficient to change the direction.

“So far, the results are decent, but they’re being compared to consensus estimates that have been persistently lowered since early summer,” noted strategists at Charles Schwab.

Tesla

(TSLA) posted a solid quarter of earnings and record revenue, but now says it will likely fall short of its target for a 50% growth in the number of cars it sells this year.

Quick rewind: As recently as July, the company said it was still aiming for a target of 50% growth from the 936,000 cars it delivered in 2021.

But with two quarters of disappointing deliveries caused by supply chain issues and Covid-related shutdowns in China, that goal has looked increasingly out of reach, my CNN Business colleague Chris Isidore reports.

CEO Elon Musk said that the electric carmaker is not struggling with demand.

“We expect to sell every car that we make, for as far in the future as we can see,” he said on a call with analysts on Wednesday.

Instead, the company said it would “just” miss its target due to complications with delivery of cars from its factories to customers at the end of the year.

Shares are down 5% in premarket trading on Thursday. They’ve dropped 37% year-to-date, compared to a 22.5% fall in the S&P 500.

“This quarter was not roses and rainbows,” said Dan Ives, tech analyst for Wedbush Securities. “Competition is increasing. There are some logistical challenges.”

America’s business leaders are becoming more pessimistic. The Conference Board recently reported a slide in its CEO confidence index, which it said had hit levels not seen “since the depths of the Great Recession.”

Of the 136 CEOs who were surveyed, 98% said they were preparing for a US recession over the next 12 to 18 months — and 99% said they were bracing for a recession in Europe.

Notably, the business community is not being quiet about its concerns.

Amazon founder Jeff Bezos tweeted Tuesday that “the probabilities in this economy tell you to batten down the hatches.”

He was responding to a clip of an interview with Goldman Sachs CEO David Solomon, who told CNBC that “it’s a time to be cautious.”

“You have to expect that there’s more volatility on the horizon now,” Solomon said. “That doesn’t mean for sure that we have a really difficult economic scenario. But on the distribution of outcomes, there’s a good chance that we have a recession in the United States.”

American Airlines

(AAL), AT&T

(T), Dow, Nucor

(NUE) and Quest Diagnostics

(DGX) report results before US markets open. CSX

(CSX), Snap

(SNAP) and Whirlpool

(WHR) follow after the close.

Also today:
Initial US jobless claims for last week post at 8:30 a.m. ET.

Existing home sales for September follow at 10 a.m. ET.
Coming tomorrow: Earnings from American Express and Verizon.
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October 20, 2022

These 11 stocks can lead your portfolio’s rebound after the S&P 500 ‘earnings recession’ and a market bottom next year

This may surprise you: Wall Street analysts expect earnings for the S&P 500 to increase 8% during 2023, despite all the buzz about a possible recession as the Federal Reserve tightens monetary policy to quell inflation.

Ken Laudan, a portfolio manager at Kornitzer Capital Management in Mission, Kan., isn’t buying it. He expects an “earnings recession” for the S&P 500
SPX,
+2.78%
— that is, a decline in profits of around 10%. But he also expects that decline to set up a bottom for the stock market.

Laudan’s predictions for the S&P 500 ‘earnings recession’ and bottom

Laudan, who manages the $83 million Buffalo Large Cap Fund
BUFEX,
-2.86%
and co-manages the $905 million Buffalo Discovery Fund
BUFTX,
-2.82%,
said during an interview: “It is not unusual to see a 20% hit [to earnings] in a modest recession. Margins have peaked.”

The consensus among analysts polled by FactSet is for weighted aggregate earnings for the S&P 500 to total $238.23 a share in 2023, which would be an 8% increase from the current 2022 EPS estimate of $220.63.

Laudan said his base case for 2023 is for earnings of about $195 to $200 a share and for that decline in earnings (about 9% to 12% from the current consensus estimate for 2022) to be “coupled with an economic recession of some sort.”

He expects the Wall Street estimates to come down, and said that “once Street estimates get to $205 or $210, I think stocks will take off.”

He went further, saying “things get really interesting at 3200 or 3300 on the S&P.” The S&P 500 closed at 3583.07 on Oct. 14, a decline of 24.8% for 2022, excluding dividends.

Laudan said the Buffalo Large Cap Fund was about 7% in cash, as he was keeping some powder dry for stock purchases at lower prices, adding that he has been “fairly defensive” since October 2021 and was continuing to focus on “steady dividend-paying companies with strong balance sheets.”

Leaders for the stock market’s recovery

After the market hits bottom, Laudan expects a recovery for stocks to begin next year, as “valuations will discount and respond more quickly than the earnings will.”

He expects “long-duration technology growth stocks” to lead the rally, because “they got hit first.” When asked if Nvidia Corp.
NVDA,
+6.14%
and Advanced Micro Devices Inc.
AMD,
+3.69%
were good examples, in light of the broad decline for semiconductor stocks and because both are held by the Buffalo Large Cap Fund, Laudan said: “They led us down and they will bounce first.”

Laudan said his “largest tech holding” is ASML Holding N.V.
ASML,
+3.79%,
which provides equipment and systems used to fabricate computer chips.

Among the largest tech-oriented companies, the Buffalo Large Cap fund also holds shares of Apple Inc.
AAPL,
+3.09%,
Microsoft Corp.
MSFT,
+3.88%,
Amazon.com Inc.
AMZN,
+6.63%
and Alphabet Inc.
GOOG,
+3.91%

GOOGL,
+3.73%.

Laudan also said he had been “overweight’ in UnitedHealth Group Inc.
UNH,
+1.77%,
Danaher Corp.
DHR,
+2.64%
and Linde PLC
LIN,
+2.25%
recently and had taken advantage of the decline in Adobe Inc.’s
ADBE,
+2.32%
price following the announcement of its $20 billion acquisition of Figma, by scooping up more shares.

Summarizing the declines

To illustrate what a brutal year it has been for semiconductor stocks, the iShares Semiconductor ETF
SOXX,
+2.12%,
which tracks the PHLX Semiconductor Index
SOX,
+2.29%
of 30 U.S.-listed chip makers and related equipment manufacturers, has dropped 44% this year. Then again, SOXX had risen 38% over the past three years and 81% for five years, underlining the importance of long-term thinking for stock investors, even during this terrible bear market for this particular tech space.

Here’s a summary of changes in stock prices (again, excluding dividends) and forward price-to-forward-earnings valuations during 2022 through Oct. 14 for every stock mentioned in this article. The stocks are sorted alphabetically:

Company	Ticker	2022 price change	Forward P/E	Forward P/E as of Dec. 31, 2021
Apple Inc.	AAPL, +3.09%	-22%	22.2	30.2
Adobe Inc.	ADBE, +2.32%	-49%	19.4	40.5
Amazon.com Inc.	AMZN, +6.63%	-36%	62.1	64.9
Advanced Micro Devices Inc.	AMD, +3.69%	-61%	14.7	43.1
ASML Holding N.V. ADR	ASML, +3.79%	-52%	22.7	41.2
Danaher Corp.	DHR, +2.64%	-23%	24.3	32.1
Alphabet Inc. Class C	GOOG, +3.91%	-33%	17.5	25.3
Linde PLC	LIN, +2.25%	-21%	22.2	29.6
Microsoft Corp.	MSFT, +3.88%	-32%	22.5	34.0
Nvidia Corp.	NVDA, +6.14%	-62%	28.9	58.0
UnitedHealth Group Inc.	UNH, +1.77%	2%	21.5	23.2
Source: FactSet

You can click on the tickers for more about each company. Click here for Tomi Kilgore’s detailed guide to the wealth of information available free on the MarketWatch quote page.

The forward P/E ratio for the S&P 500 declined to 16.9 as of the close on Oct. 14 from 24.5 at the end of 2021, while the forward P/E for SOXX declined to 13.2 from 27.1.

Don’t miss: This is how high interest rates might rise, and what could scare the Federal Reserve into a policy pivot

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October 17, 2022

4 Ways To Create and Sustain A Recession-Proof Business

Opinions expressed by Entrepreneur contributors are their own.

Being a boss is hard, and it can elicit overwhelm and stress daily. This overwhelm is exacerbated when economic instability is looming. If you are an entrepreneur (in good times), you understand the map to success is stitched together with rejection, innovation and inspiration. My tenure as a business consultant and coach has given me an eagle-eye view of the fumbles and missteps of emerging talent. Let’s peek behind the curtain, which offers a glimpse into entrepreneurs‘ biggest enemies.

The enemies of entrepreneurship are aligning energies with promises of instant gratification, the inability to build relationships, and a hyper-focus on the bottom line. The words “easy” and “instant” are nowhere in the definition of entrepreneurship. Most importantly, in times of flux, the foundation of business building is consistency.

I see entrepreneurs who are brainwashed by the glorious algorithms of social media. Many entrepreneurs believe that TikTok and Instagram are their paths to riches and fame. I have walked with brilliant small business owners who focus on the bottom line and fail to understand the power of relationships. And I have been privy to the wave of overwhelm when business owners are faced with rejection. The energy that we align ourselves with is a make-or-break deal. And when we attempt to elevate our business to the next level alone, we are often banished to an island of stagnancy.

Related: How to Recession-Proof Your Business

Flexibility is the key to being recession-proof

Experiencing fluctuations as a business is a norm. Adaptability is the cornerstone of an agile company that can withstand blips on the radar and experience steady growth. With the recession looming and the stock market volatility on the tips of everyone’s tongues, it is time to think outside the box and become recession-proof.

When challenges are lobbed at us, it is often an innate response to turn inward, spend less money, and recoil from opportunity. Many entrepreneurs hunker down and wait for the juicy markets of yesteryear. I learned the lesson of reacting to spikes in global instability the hard way. When the pandemic ebbed its way into global consciousness, my immediate response was to go into overdrive. I amped up marketing strategies with phronetic energy. I did this because I connected with the news media’s deafening cadence, which proclaimed imminent economic doom. I attached my energy to the panic — and went into overdrive. This frantic attempt at trying to stay relevant led to burnout.

When I took a step back to analyze my value proposition during an economic downturn, I recognized that my services could align in a new way with the new needs of potential clients. It is imperative to understand the needs of potential clients, no matter the economic or social climate. For example, if you are a coach or consultant, you must have your finger on the pulse of what your people need from you now.

Staying stagnant in your brand messaging is perhaps the worst path for any entrepreneur. Being relevant, flexible and understanding your value in times of calamity can be your biggest strength. To become recession-proof, you must audit the fluctuations of your clients’ most significant needs. A savvy entrepreneur will adjust and fulfill their client’s new needs.

Asking for help is a strength

One of my most successful clients, who has withstood the fluctuations of an ever-changing market, recognized that she must be proactive in her success. Mika Altidor, the founder of the acclaimed vegan bakery, V&M Bakery, knew instinctively that the pandemic could be the downfall of her restaurant business. With a fail rate of 80%, many restaurants folded under pandemic pressure. Altidor knew she could not transition this wave by herself. The pandemic forced a significant shift in the restauranteur paradigm, and Altidor reached out to a coach and the expertise of mentors on Score.Org.

Altidor firmly grasped the guidance and mentorship of her team and recalibrated her approach to serving delicious food to the masses. She wrote a cookbook, teamed up with local restaurants, and commanded a collective powerhouse in her local area.

Related: 6 Proven Business Marketing Strategies to Grow During a Recession

Join a community

To be a recession-proof business, you must lock arms with individuals navigating the same space. Joining a networking community or mastermind group that is adequately moderated can groom your business’ growth. Professional communities are incubators for innovation, fresh ideas and new connections. There is an abundance of communities on LinkedIn that offer advice and networking that can change the trajectory of your business.

Often entrepreneurs are offered the illusion that working harder will increase their returns. Yet, the truth is that working smarter and surrounding yourself with people who have traversed your journey successfully is the most ingenious way to elevate your business plan.

Take a glance at your original business plan and make modifications. Modifying your original game plan is the only way to survive the turbulence.

Related: 9 Smart Ways to Recession-Proof Your Business (Fast)

Stop chasing shiny objects

To be a victor in the recession, you must stop chasing shiny objects. Shiny object syndrome is defined as the insatiable desire to follow the newest trends in the hopes of attracting undue attention. Chasing fads and trends is only a temporary band-aid on entrepreneurs’ wounds. All businesses’ tried and true foundations are built on creating sustainable relationships that stand the test of time.

Julie Lokun, JD

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October 17, 2022
With a Recession Looming and Interest Rates Rising, What’s Next for the Economy?

Opinions expressed by Entrepreneur contributors are their own.

The S&P 500 is down nearly 20% year-to-date, the dollar has lost lots of buying power, and the fed has made it increasingly difficult for young buyers to purchase their first home.

With all these factors at play, it is essential to listen to economic experts like Jerome Powell. Powell spoke on interest rates again in early September. The Fed is expected to continue raising interest rates until the inflation numbers are under control. “Restoring price stability will take some time and requires using our tools forcefully to bring supply and demand into better balance,” Mr. Powell said in those remarks. “While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”

Dominic Blanco

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October 14, 2022
What happens if World Bank President’s recession fears come true?

World Bank President David Malpass believes the global economy is “dangerously close” to a recession. His comments came as the institution lowered its 2023 global growth forecast from 3 per cent to 1.9 per cent.

“We’ve lowered our 2023 growth forecast from 3 per cent to 1.9 per cent for global growth. That’s dangerously close to a world recession,” Malpass said while addressing reporters on the sidelines of the annual World Bank-International Monetary Fund (IMF) meeting.

He added that hike in interest rates, decreased capital flows, debt build-up and depreciation of currency are compounding the challenges faced by developing nations. Malpass further explained that developing nations are facing debt build-up due to high interest rates, which leads to an increase in the amount of their debt.

So, if a recession – as Malpass fears – were to happen, how bad would it be and what must the world do to tide over it?

How does recession impact whom?

Malpass is not the only one who believes that we are close to a global recession. Saugata Saha, President of Global Commodity Insights at S&P, told Business Today earlier that the credit rating agency has predicted a 40-50 per cent chance of a technical recession. He also explained that recession has a varied impact across geographies and populations.

Citing the example of the coronavirus pandemic, Saha underscored, “Look at the short recession that happened in 2020 with the onset of Covid-19. Some parts of the economy and population recovered a lot sooner than others, depending on whether you were a white-collar worker, a blue-collar worker or the segment you were working in.”

He added while labour markets have been disrupted, supply chain has also been affected. Supply chain disruptions and geopolitical events coupled with higher demand for certain commodity classes will lead to elevated commodity prices in the future.

WTO chief Ngozi Okonjo-Iweala said people will be worst affected by food crisis and inability to access energy. She mentioned, “The spectre of not having enough food is one that worries me.”

Also read: World heading towards global recession, radical policies needed to bolster growth: WTO chief

Will it be a mild recession?

KPMG, one of the Big Four accounting organisations, said in its KPMG 2022 CEO outlook survey that 86 per cent of the CEOs believe a recession is likely in the next 12 months but 58 per cent of them feel it will be mild.

The survey further underlined that recession will make post-pandemic recovery all the more difficult. While 73 per cent CEOs were of the opinion that a recession will capsize growth over three years, 71 per cent predicted company earnings falling by around 10 per cent over the 12 months in the event of a recession.

While global agencies and institutions are sounding the recession warning, US President Joe Biden said if a recession happens at all, it will be mild. Biden said in an interview, “I don’t think there will be a recession.” He added, “If it is, it’ll be a very slight recession. That is, we’ll move down slightly.”

How does the world tide over a recession?

In the midst of a raging debate on recession, the question is how to tide over a global recession? Tata Steel CEO and MD TV Narendran believes that building optimised and resilient supply chains is an important measure in this regard.

He said, ” There are opportunities to rethink business models and operating models, as well as build the necessary green infrastructure.”

World Bank President Malpass also said earlier that boosting production, additional investments, improved productivity and capital allocation should be on the top of policymakers’ checklists. He further believes targeted support for the poor is key during such trying times.

IMF chief Kristalina Georgieva said that the global institution will continue supporting the efforts of central banks around the world to contain inflation even if it has a negative impact. She also advocated for targeted measures in the fiscal arena to ensure there is no more “fuel to the flames of inflation.”

(With agency inputs)

Also read: ‘Bright spot on dark horizon’: IMF Director hails Indian economic growth amid recession fears

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October 13, 2022
The Secret to Driving Revenue Even When The Markets Are Down
Opinions expressed by Entrepreneur contributors are their own.
As conversations around a looming recession increase, startups and scale-ups have seen more and more calls and letters from investors to tighten the ship and focus on profitability. Inflation, rising interest rates and the stock market’s decline have all caused investors to run scared of companies that have yet to prove their ability to move nimbly through uncertain waters. Companies are feeling the pinch of a recession, and their reserves are dwindling — and the imperative is to extend one’s runway until the tide turns again.

But how does that affect the investments in digital that brick-and-mortar enterprise companies have been making? The companies that will be able to weather the storm can drive revenue, even when the market is down, and digital is key to this. However, investments will also be scrutinized similarly but not to the same extent as in the startup world. That’s why the answer lies in digital efficiency.

Digital efficiency can be seen as a two-pronged approach:
1. Refocusing what we’re pursuing with our digital initiatives: We need to place less investment in potentially disruptive innovation and more in the application of technology that will allow our business to be more efficient in its current iteration — operational efficiency, be it in sales, servicing or any other area of the business.
2. Being more efficient in how we get to those results: Improving how our teams work to generate more business value faster with the same or lesser investment. This is certainly not trivial, and I outline below four fundamental steps toward that.
Related: How the Changing Labor Market Is Impacting Digital Transformation

Embrace the product mindset

The first step toward digital efficiency is transitioning from a project-based mindset to a product-based mindset. With a project mindset, we focus on finishing each project or delivering one specific functionality. A product mindset moves away from completing a single project and toward achieving business results that tangibly show up for our customers and clients daily. Perhaps ironically, in the current context, this is a lesson from startups that most enterprises haven’t learned yet.

A project ends, but our products and processes should constantly evolve based on customer feedback. There can be no scheduled beginning, middle or end to a product but rather an acknowledgment that we must continuously adapt and evolve as the market and consumer needs change. We must focus on going to market fast, with a minimum set of features, listen to customers through data analytics and evolve quickly with minimum investment, understanding at each step how much closer we are to achieving our business goals.

Digital efficiency requires we prioritize continuous iteration in product development. Treat your products like living organisms — ones that will suffocate if you don’t release them to the market and allow them to grow as soon as possible. The work does not stop just because the project does. It simply moves into the next phase of its life cycle.

Related: Does Your Business Need a Digital Transformation?

Bring your engineering practices into the future

Assuming we’re already pursuing business goals with a product mindset, digital efficiency implies that we will get there quickly and efficiently — meaning that our engineering practices are not only up-to-date but ahead of the curve. Take stock of your practices, including developer velocity, automation and product quality, and measure how they stand against peak performance metrics.

With the abundance of data now available, it is easier than ever to benchmark our processes and improve our DevOps. DORA Metrics has conducted in-depth market research to identify four metrics that measure elite performance: deployment frequency, lead time for changes, change failure rate and time to restore service. And while I won’t go into the minute details of the importance of each right now (you’d be reading for another ten pages), leaders can and should utilize these metrics to analyze their engineering practices and bring them up to the standards of elite performance in the 2022 marketplace.

Related: The Role of Company Culture In Digital Transformation

Lean teams are agile teams

The final element of digital efficiency is creating lean teams. Digital efficiency requires teams to become more autonomous to avoid communication delays and unnecessary meetings or check-ins. Lean teams focus on operational efficiency, asking, “can we achieve more with the same level of investment?” There is no more coasting from project to project — give your engineers a reason to have skin in the game and truly invest in the success of each product they release.

Lean teams will be essential as we potentially head toward a recession. With less overhead, we can easily face the upcoming tumult — there is no unnecessary baggage to weigh us down, and we can move through even the stormiest of skies with agility.

Transparency with outsourcing partners

Brick-and-mortar companies leverage a lot of outsourcing, and those they are outsourcing with must keep their practices transparent so the companies can see how well their outsourcing partners are doing. Businesses need to know that their partners understand their initiatives as digital products rather than projects. Ensuring their partners fully understand this mindset is essential to raising the bar and setting internal benchmarks.

It’s one thing to know on paper what a good metric is, but another struggle to feel those metrics are possible. Everyone can be an elite performer, but they must have the right mentality, practices and teams to achieve that standard. This standard is not only something the unicorns of the world can achieve. It is something companies should aim to have in their organizations. Once you find partners that demonstrate they can not only achieve the benchmarks set for them but excel, your team will be supported enough to achieve that elite status.

Don’t be caught skinny dipping

It is easy to get comfortable with the status quo when the economy is doing well — the cash is flowing, so how could there be any room for improvement? However, to paraphrase Warren Buffet, when the tide goes down, you can see who’s naked.

With a looming recession, we are all set to determine our company’s effectiveness. Don’t let yourself be caught swimming in the pool without a bathing suit or even a towel in sight — prepare for the economic downturn today by prioritizing digital efficiency.
Leonardo Mattiazzi

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October 13, 2022
3 Ways Inflation is Impacting the Food and Beverage Industry

Opinions expressed by Entrepreneur contributors are their own.

Inflation is top of mind these days, and for good reason. Just this summer, inflation rose to its highest rate in 40 years. And under these conditions, it seems just about everyone (two-thirds of the country to be exact) is living paycheck to paycheck.

The food and beverage industry is being hit particularly hard — especially as the cost of food, groceries and eating at restaurants have all shot up. So, what impact is inflation having in the market? Let’s get into it:

Related: Restaurants Are Adding ‘Inflation Fees’ to Customer Checks

1. Changing consumer habits

In one respect, the food and beverage industry is lucky: Many of the items and services they sell are considered necessities — but that doesn’t mean it’s safe from changing consumer habits.

Prices of staples like meat, eggs and bread are soaring at grocery stores across the country. Americans aren’t getting a break at their favorite restaurants, either, as those choosing to dine in or take out are also experiencing increased prices for meals. Compared to 2021, the food-away-from-home index saw its largest 12-month increase in nearly four decades.

As a result, consumers are thinking strategically about the cost of what they’re eating, both inside and outside of the home. Products and behaviors they might not have thought twice about in the past may now seem lavish. They might also be switching to different brands, stores and restaurants where they can find lower prices. In fact, recently, more consumers have been substituting their favorite brand-name products with comparable store-brand items.

To combat this, some companies are offering more for less. Take Taco Bell‘s five-item Big Bell Box combo for example, which has been a fan favorite during inflation. But not all brands can afford this strategy. So, instead, they can focus their efforts on customer retention with innovative marketing and advertising, loyalty programs and low-cost perks (like offering delivery) to keep their loyal customers despite price increases.

Related: Wingstop And Hershey Are Two Food Stocks Overcoming Inflation

2. Higher operating costs

Higher prices don’t just affect consumers — they also impact a business’s bottom line. Add global supply chain issues and labor shortages to the mix, and it’s a recipe for an operating nightmare and a higher cost of doing business.

Food and beverage businesses have experimented with several solutions to address higher operating and manufacturing costs. One answer, taken up by restaurants and large consumer brands like Chobani and Fritos, has been to simply offer less product for the same price, known colloquially as “shrinkflation.” While this practice isn’t new, it is often implemented without warning. And frustrated customers have called out companies on what they view as a deceptive business practice. To avoid similar backlash, some have been more upfront about their shrinking portions, like Domino’s Pizza did when it reduced its 10-piece wings by two. (Granted, this change would have been pretty hard to conceal).

Another, perhaps obvious, solution to cope with an increase in operating costs is to pass the burden on to consumers via price hikes. While many have done this, in both grocery stores and restaurants, some argue it could harm consumer demand and/or brand loyalty in the long term.

The pros and cons of dealing with the current operating costs highlight inflation’s impact on the industry, and individual businesses must walk a tightrope to find solutions that work for them and their unique customer base.

Related: What Is Shrinkflation? 3 Ways to Protect Your Wallet.

3. A pivot to beverages

While there’s no argument that inflation has negatively affected both consumers and companies, it has also opened up opportunities for entrepreneurs and creative thinkers. And while overall industry and consumer habits are changing, Americans’ demand for beverages hasn’t been stifled — particularly for alcohol.

As more of the country returns to bars due to post-pandemic restrictions, alcohol sales have been largely unaffected, even though prices increased (albeit not as sharply as some other products). This has led to innovation in the spirit industry, with companies creating new products like hard seltzers or even hard coffee.

However, alcohol isn’t the only beverage riding high. Companies like Coca-Cola have experienced impressive revenue gains. Last year, for the first time, 46 of the top 100 products on IRI’s New Product Pacesetters list were beverages. Additionally, eight beverage products landed in the top 10, including new offerings from Dr. Pepper and Minute Maid.

And while this new crop of beverages doesn’t mean companies weren’t impacted by inflation, it is an impressive showing of what it means to follow consumer demand in turbulent times. It also highlights that, although Americans are seeing more money leave their wallets, they’re still willing to shell out for products they want and care about. For some entrepreneurs, pursuing this trend could prove to be worth the risk, even in today’s economy.

While inflation has affected the ways we do business, it has also presented opportunities for those in the food and beverage industry to work in new ways. In a time when the economy is in flux and prices for goods and services are increasing, it’s important for entrepreneurs to be adaptive and open-minded in an ever-changing market.

Danilo Diazgranados

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October 13, 2022
The pandemic forced innovation, but the expected recession may force businesses to do even more

The effects of COVID-19 forced companies across many industries to adapt and innovate rapidly. Yet even as the pandemic subsides, there are opportunities for business leaders to continue to apply the lessons they have learned over the last few years.

“Where we are today … retail is a completely different industry [than in 2019],” Kohl’s CEO Michelle Gass said Tuesday during Fortune’s Most Powerful Women Summit in California. “So many changes—from living through the pandemic, supply chain challenges, the spikes in demand, the pull back in demand, labor.”

But the roller coaster ride likely isn’t over yet, as many experts predict the U.S. will enter a recession next year due to the Federal Reserve’s attempts to tamp down soaring inflation with interest rate hikes.

Gass said Kohl’s is already grappling with recession fears and inflation woes. “We’ve already started feeling it,” she said. “We operate in the more discretionary categories, as opposed to food and gas, and where a lot of budgets are being constrained. And so, as we see this unfolding, we are quickly adapting.”

While Gass acknowledged that her company is holding off on stocking up on inventory, Kohl’s, like many companies today, is using the current circumstances as a “catalyst for change,” she explained. “Oftentimes the harder things are around really structurally changing your cost, structurally changing the way you’re working,” she said.

The retailer is also utilizing customer data more than ever before. Gass noted that Khol’s serves 65 million customers across the country, and the chain has over 30 million subscribers in its loyalty program.

“For someone passionate about data—because it’s a treasure chest—we’re able to tailor and actually do different offers for Julie and Alan, based on what’s going to get them motivated to come and shop,” Gass said. “That, especially in this environment, is extremely powerful to make sure that you’re giving offers to people who need it, versus not.”

But utilizing data comes with challenges as well, said Julie Sweet, chair and CEO of Accenture. “This is the area where I think everyone intuitively understands that data is important. And I’ve not yet found a company that has actually solved the problems of data,” she said.

Sweet’s team is spending time talking to CEOs today around five key forces of change, the first being the “total enterprise reinvention through technology.” Sweet said most businesses have talked about digitization, but reinvention goes a step further and asks companies to systematically overhaul everything that they do. “That has profound implications for how you invest and think about the future,” Sweet said.

Talent is the second key—how companies access talent, create opportunities to unlock talent potential and build pathways to future growth.

Sustainability, broadly, is third. It includes aspects like energy transformation, but it’s also about diversity and what companies are doing within the communities they operate and how that all translates to the bottom line, Sweet said.

The metaverse is the fourth key force of change, an area where Accenture in particular has made a lot of investment, building its own metaverse for onboarding and employee training. “I will say lots of debate around this, but there isn’t a company or industry that doesn’t need to be thinking about what is it going to be like to go in and out of the virtual and physical world and how will that profoundly change everything, from what we buy, how we buy it, to how we work,” Sweet said.

Finally, the last aspect is the “ongoing technology revolution,” Sweet said. Companies are already investing in this today, but Sweet said leaders need to be able to think ahead and really understand how those trends might affect the business. “It’s also an important part of what CEOs and their leadership teams have to do today.”

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Megan Leonhardt

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October 12, 2022
Fed more worried about risks of ‘unacceptably high’ inflation than overdoing rate hikes, meeting minutes show

Calling inflation “unacceptably high,” Federal Reserve leaders saw their strategy of fighting price pressures aggressively as less risky to the economy than doing too little, minutes of the bank’s last meeting show.

The Fed approved another jumbo-size increase in U.S. interest rates at its Sept. 21-22 meeting. It also signaled plans for another pair of big increases before year-end in a surprise to Wall Street
DJIA,
-0.10%.

The minutes of the Fed’s meeting underscore that top officials were disappointed and worried about persistently high inflation.

“A sizable portion of the economic activity has yet to display much response,” the Fed minutes said. “Inflation had not yet responded appreciably to a policy tightening.”

While some senior Fed officials also worried the bank could go too far and damage the economy, the majority appeared to believe it was vital for the central bank to squelch inflation, even if that meant keeping rates high for a prolonged period.

“Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” the minutes said.

The Fed predicts the economy will eventually slow as rates rise, but it noted the labor market remains extremely tight.

Fed officials also expressed concern that oil prices could rise again, supply chains would not heal as quickly as expected and that rising wages could exacerbate inflation.

“Inflation was declining more slowly than [Fed officials] had been anticipating,” the minutes said.

The internal Fed debate has also playing out publicly since the last meeting.

Some senior officials such as Atlanta Federal Reserve President Raphael Bostic hope the bank will make enough progress in its fight against inflation to “pause” rate hikes at the end of this year.

Fed critics contend the bank is going to go too far and could plunge the economy into a second recession in four years. A pause would allow the Fed to see how much its prior rate hikes have succeeded in lowering the rate of inflation, they say.

Others such as Minneapolis Fed chief Neel Kashkari and Cleveland Fed boss Loretta Mester say the Fed needs to take whatever steps necessary to quell inflation as soon as possible.

Failing to do so, they contend, would make it even harder to get prices back under control if Americans come to view high inflation as the norm. That would do even more damage to the economy in the long run.

Jennifer Lee, senior economist at BMO Capital Market, downplayed the debate and said the Fed in unified on its next few steps.

“The Federal Reserve is pretty much in sync and is not going to be easing anytime soon,” she said.

Since March the Fed has lifted a key short-term interest rate from near zero to an upper end of 3.25%. And the central bank has telegraphed plans to raise the so-called fed funds rate to as high as 4.75% by next year.

Rising U.S. interest rates has done little so far to douse inflation.

The rate of inflation, using the Fed’s preferred PCE price index, rose at a yearly rate of 6.2% as of August. That’s a long way off from the Fed’s forecast for inflation to fall to 2.8% in 2023 and 2.3% by 2024.

The higher cost of borrowing has only chilled a few parts of the economy, most notably housing.

The rate on a 30-year mortgage has surged above 7% to a 16-year high from less than 3% one year ago. The result has been a slowdown in home buying and construction and softer sales of home furnishings.

Most consumer and business loans are influenced by the fed funds rate.

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October 12, 2022
Opinion: The Fed doesn’t have a choice anymore. Get ready for a recession | CNN Business

Editor’s Note: Gad Levanon is the chief economist at the Burning Glass Institute. He’s the former head of The Conference Board’s Labor Market Institute. The opinions expressed in this commentary are his own.

To many economists and analysts, the US economy has represented a paradox this year. On the one hand, GDP growth has slowed significantly, and some argue, even entered a recession. On the other hand, overall employment growth has been much stronger than normal.

While GDP declined at an annualized rate of 1.1% in the first half of 2022, the US economy added 2.3 million jobs in the last six months, far more than in any other six-month period in the 20 years prior to the pandemic.

This tight labor market – and the rapid wage growth it has spurred – is causing inflation to become more entrenched. The Consumer Price Index, which measures a basket of goods and services, was 8.3% year-over-year in August. That’s lower than the 40-year high of 9.1% in June, but still painfully high. To address it, the Federal Reserve is likely to drive the economy into a recession in 2023, crushing continued job growth.

Why has employment growth remained so strong? First, the US economy is holding on better than many expected. The Atlanta Fed’s GDPNow estimate for real GDP growth in the third quarter of 2022 is 2.3%, suggesting that while the economy is now growing much more slowly than it did last year, we are still not in a recession. When the demand for goods and services strengthens, so does the demand for workers producing these goods and services.

Second, despite the slowing of the economy and the growing fears of recession, layoffs are still historically low. Initial claims for unemployment insurance, an indicator highly correlated with layoffs, were 219,000 for the week ended October 1 – higher than the week prior, but still one of the lowest readings in recent decades. After years of increasingly traumatic labor shortages, many employers are reluctant to significantly reduce the number of workers even as their businesses are slowing. That’s because companies are worried that they will have trouble recruiting new workers when they start expanding again.

Third, many industries are growing faster than normal because they are still recovering from the pandemic. Convention and trade show organizers, car rental companies, nursing homes and child day care services, among others, are all growing fast because they are still well below pre-pandemic employment levels.

Fourth, just as some industries are growing because they are still catching up, others are experiencing high growth as they adjust to a new normal of higher demand. Demand for data processing and hosting services, semiconductor manufacturing, mental health services, testing laboratories, medical equipment and pharmaceutical manufacturing is higher than before the pandemic. And it’s likely that these represent structural changes to buying patterns that will keep demand high.

Fifth, during the pandemic, corporate investments in software and R&D reached unprecedented levels, which drove a rapid increase in new STEM jobs. Because these workers are especially well paid, they have had plenty of disposable income to spend on goods and services, which has supported job growth throughout the economy.

These factors are spurring positive momentum that will not disappear overnight. Employment growth is likely to slow down from its historically high rates, but it will still remain solid in the coming months. ManpowerGroup’s Employment Outlook Survey shows that the hiring intentions for the fourth quarter are still very high, despite dropping from the previous quarter.

Next year, however, will look very different. Many of the industries that are still recovering from the pandemic will have reached pre-pandemic employment levels. With demand saturated, those industries may revert to slower hiring. But this alone is unlikely to push job growth into negative territory. What will do that is monetary policy.

There are two ways to rein in the labor market: Either reduce demand for workers or increase the labor supply. But it’s hard to engineer a boost in labor supply. That takes the kind of legislative action needed to increase immigration, drive people into the labor force or grow investment in workforce training. This is likely to prove elusive in today’s polarized political environment.

The only option that leaves the Fed is to engineer a recession by continuing to raise interest rates. Expect to see that happen in 2023.

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October 7, 2022
GDP set to turn positive again due to shrinking U.S. trade deficit and end ‘rule-of-thumb’ recession

The numbers: The U.S. international trade deficit fell in August to a 15-month low of $67.4 billion, paving the way for a resumption of growth in gross domestic product in the third quarter.

The deficit narrowed 4.3% from $70.5 billion in July, the government said Wednesday. It was the fifth decline in a row.

Economists polled by The Wall Street Journal had forecast a deficit of $67.7 billion.

GDP contracted in the first two quarters, meeting an old rule-of-thumb for when an economy is in recession.

The group of prominent economists that makes the official declaration, however, uses a broader definition that suggests the economy has avoided a recession.

Big picture: The U.S. trade deficit has tumbled since peaking at a record $106.9 billion in March. Exports have risen and imports have declined, particularly because of falling oil prices.

Lower trade deficits add to GDP, the official scorecard of the economy. The shrinking trade gap is set to add a whopping 3 points to third-quarter GDP, according to estimates from S&P Global Market Intelligence.

That’s the mirror opposite of what happened in the first quarter, when the record trade gap caused GDP to turn negative for the first time since early in the pandemic.

The result: GDP is set to rise for the first time in three quarters, ending at least for now any talk that the U.S. is already in recession.

Which way the trade deficit trends in the months ahead is less clear. A strong dollar is hurting U.S. exporters while a slowing economy could force Americans to reduce spending on imports even though they are cheaper to buy.

Ditto for the economy. While it’s still growing, the pace of expansion is expected to slow as the Federal Reserve jacks up interest rates to try to tame high inflation.

Key details: Exports slipped 0.3% in August to a $258.9 billion, but it’s still the second highest level on record.

Imports dropped 1.1% to $326.3 billion, marking the lowest level since early 2021.

Looking ahead: “The further sharp decline in the trade deficit… means that net exports provided a big boost to third-quarter GDP growth,” said senior U.S. economist Andrew Hunter at Capital Economics. “But the twin drags from the surging dollar and the deteriorating global economy suggest that strength will fade soon.”

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.27%
and S&P 500
SPX,
+0.20%
sank in Wednesday trades following a two-day rally.

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October 5, 2022
Why the ghost of 2008 still haunts us in 2022 | CNN Business

This story is part of CNN Business’ Nightcap newsletter. To get it in your inbox, sign up for free, here.

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CNN Business
—

All week, there have events in the news that have come in under of the banner of “this hasn’t happened since 2007/2008.”

Yields on the 10-year Treasury briefly surpassed 4%, a level not seen since 2008. That movement helped push mortgage rates to their highest level, 6.7%, since — wait for it — July 2007. Across the pond, where the UK bond market crashed earlier this week, one seemingly frazzled London banker told the Financial Times: “At some point this morning I was worried this was the beginning of the end. It was not quite a Lehman moment. But it got close.”

The timing of all these events is indeed a bit spooky: Today, September 29, marks 14 years to the day that stock markets around the world cratered, ushering in the worst global financial crisis since the Great Depression.

With all that gloom, it’s natural to wonder whether history is about to repeat itself.

To be clear: The market ended up recovering completely — though it took years. And in so many ways, the economic and financial angst playing out around the world is absolutely not a repeat of the run-up to the Great Recession. It’s a whole different beast now.

But it is precisely because of those 2008 scars, still potent memories for many, that economists and analysts become nervous when things go as haywire as they have in recent weeks.

Right now, the prevailing mood is fear. Economies hobbled by inflation and soaring borrowing costs are vulnerable to economic shocks — whether those shocks come from a catastrophic hurricane, or a superpower declaring war on a neighbor, or a radical unfunded tax scheme. Or, heaven forbid, a resurgent pandemic.

All of that means there aren’t many good places for investors to put their money right now. Stocks and bonds are both in bear territory, and many analysts say the market could remain volatile until inflation gets under control (which, if we crash into a recession, could happen pretty soon… not a great silver lining, I know.)

If there’s a lesson to hold onto from the Great Recession, it’s not to panic. Per my colleague Jeanne Sahadi:

Let’s say you’d invested $10,000 at the start of 1981 in the S&P 500. That money would have grown to nearly $1.1 million by the end of March 2021. But had you missed just the five best trading days during those 40 years, it would only have grown to roughly $676,000.

In other words: Hold on tight, friends, and try to avoid looking at your 401(k) balance for the foreseeable future.

Stocks fell Thursday, giving up Wednesday’s big gains and plunging the Dow back into a bear market.

The S&P 500, one of the broadest measures of the health of Corporate America, fell 2.1%, hitting a new low for the year. The Dow and S&P 500 are once again not far from their lowest levels since November 2020.

Heckuva way to wrap up the third quarter, eh? The stock market actually had a promising start to the quarter in July. But fears about inflation, rate hikes, rising bond yields and recession returned with a vengeance in August and September.

Continuing a grand tradition of Corporate Rebranding Nonsense, Johnson & Johnson is putting all of its consumer health products under a newly formed parent company.

Soon, Band-Aid, Tylenol, Benadryl and Johnson’s baby powder will all be sold under the umbrella brand identity “Kenvue.”

That’s pronounced “Ken,” like the doll, “view.”

Here’s the deal: Johnson & Johnson, the owner of these labels, is in the process of splitting into two companies — one focused on medical devices and medications, the other on consumer health products, my colleague Nathaniel Meyersohn reports.

J&J is keeping its recognizable name for its larger pharmaceutical business, but it needed something new for the smaller consumer arm.

The company said Wednesday that it landed on Kenvue, a combination of “Ken,” an English word for knowledge primarily used in Scotland, and “vue,” a reference to sight.

“Kenvue” is the winning moniker that a small team from J&J, working with a naming agency, landed on. The goal was to be memorable. And, crucially, to clear trademarks in more than 100 markets and “pass linguistic and cultural screenings in 89 languages and dialects.”

The company also released Kenvue’s new logo — white letters against a green background, the limbs of the letter “K” resembling a sideways heart.

What does it mean? Absolutely nothing, and that is the point.

Corporations gravitate to names that are squeaky clean. There’s no possibility for a negative connotation, because it’s a made-up word. It doesn’t, as far as I can tell, sound like it might resemble a swear word in some other language. Kenvue is inoffensive. Bloodless. It is the tofu of corporate branding.

“It’s really just a holding company behind all these other brands,” one expert told Nathaniel. “They want a name that will disappear in the background and the brands will stick out.”

(Mission accomplished. I’ve already forgotten the new name and I just typed it 40 seconds ago.)

MY TWO CENTS

The best review I can give of the new brand is that it’s forgettable. Other companies have famously (infamously?) failed to stick the landing with new names.

Netflix, back in 2011, quickly backtracked after trying to rechristen its DVD mailing service as “Qwikster.” More recently, Fiat Chrysler and PSA Group merged in 2020 under the collective name “Stellantis,” which is still the company’s name, but I still think it sounds like something you should ask your doctor about if you have signs of seasonal depression.

Enjoying Nightcap? Sign up and you’ll get all of this, plus some other funny stuff we liked on the internet, in your inbox every night. (OK, most nights — we believe in a four-day work week around here.)

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September 29, 2022
The UK is gripped by an economic crisis of its own making | CNN Business

London
CNN Business
—

A week ago, the Bank of England took a stab in the dark. It raised interest rates by a relatively modest half a percentage point to tackle inflation. It couldn’t know the scale of the storm that was about to break.

Less than 24 hours later, the government of new UK Prime Minister Liz Truss unveiled its plan for the biggest tax cuts in 50 years, going all out for economic growth but blowing a huge hole in the nation’s finances and its credibility with investors.

The pound crashed to a record low against the US dollar on Monday after UK finance minister Kwasi Kwarteng doubled-down on his bet by hinting at more tax cuts to come without explaining how to pay for them. Bond prices collapsed, sending borrowing costs soaring, sparking mayhem in the mortgage market and pushing pension funds to the brink of insolvency.

Financial markets were already in a febrile state because of the rising risk of a global recession and the gyrations caused by three outsized rate increases from a US central bank on the warpath against inflation. Into that “pressure cooker” stumbled the new UK government.

“You need to have strong, credible policies, and any policy missteps are punished,” said Chris Turner, global head of markets at ING.

After verbal assurances by the UK Treasury and Bank of England failed to calm the panic — and the International Monetary Fund delivered a rare rebuke — the UK central bank pulled out its bazooka, saying Wednesday it would print £65 billion ($70 billion) to buy government bonds between now and October 14 — essentially protecting the economy from the fallout of the Truss’ growth plan.

“While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position,” said Paul Dales, chief UK economist at Capital Economics, commenting on the bank’s intervention.

The emergency first aid stopped the bleeding. Bond prices recovered sharply and the pound steadied Wednesday against the dollar. But the wound hasn’t healed.

The pound tumbled 1%, falling back below $1.08 early Thursday. UK government bonds were under pressure again, with the yield on 10-year debt climbing to 4.16%. UK stocks fell 2%.

“It wouldn’t be a huge surprise if another problem in the financial markets popped up before long,” Dales added.

The next few weeks will be critical. Mohamed El-Erian, who once helped run the world’s biggest bond fund and now advises Allianz

(ALIZF), said that the central bank had bought some time but would need to act again quickly to restore stability.

“The Band-Aid may stop the bleeding, but the infection and the bleeding will get worse if they do not do more,” he told CNN’s Julia Chatterley.

The Bank of England should announce an emergency rate hike of a full percentage point before its next scheduled meeting on November 3. The UK government should also postpone its tax cuts, El-Erian said.

“It is doable, the window is there, but if they wait too long, that window is going to close,” he added.

The UK government has previewed rolling announcements in the coming weeks about how it plans to change immigration policy and make it easier to build big infrastructure and energy projects to boost growth, culminating in a budget on November 23 at which it has promised to publish a detailed plan for reducing debt over the medium term.

But it shows no sign of backing away from the fundamental policy choice of borrowing heavily to fund tax cuts that will mainly benefit the rich at a time of high inflation. And the UK Treasury says it won’t bring forward the November announcement.

Truss, speaking publicly for the first time since the crisis erupted, blamed global market turmoil and the energy price shock from Russia’s invasion of Ukraine for this week’s chaos.

“This is the right plan that we’ve set out,” she told local radio on Thursday.

One big problem identified by investors, former central bankers and many leading economists is that her government only set out half a plan at best. It went ahead without an independent assessment from the country’s budget watchdog of the assumptions underlying the £45 billion ($48 billion) annual tax cuts, and their longer term impact on the economy. It fired the top Treasury civil servant earlier this month.

Charlie Bean, former deputy governor at the Bank of England, told CNN Business that the government was guilty of “really stupid” decisions. His former boss at the bank, Mark Carney, accused the government of “undercutting” UK economic institutions, saying that had contributed to the “big knock” suffered by the country’s financial system this week.

“This is an economic crisis. It is a crisis… that can be addressed by policymakers if they choose to address it,” he told the BBC.

British newspapers have started to speculate that Truss will have to fire Kwarteng, her close friend and political soulmate, if she wants to regain the political initiative and prevent her government’s dire poll ratings from plunging even further.

“Every single problem we have now is self-inflicted. We look like reckless gamblers who only care about the people who can afford to lose the gamble,” one former Conservative minister told CNN.

But for now she’s trying to tough it out, and cling onto the Reaganite experiment.

“Raising, postponing, or abandoning tax cuts will be avoided by Truss at all costs as such a reversal would be humiliating and could leave her looking like a lame duck prime minister,” wrote Mujtaba Rahman and Jens Larson at political risk consultancy Eurasia Group.

The only alternative left to balance the books would be to slash government spending, and that would prove equally politically difficult as the country enters a recession with its public services under enormous strain and a restive workforce that has shown it’s ready to strike in large numbers over pay.

“Truss and Kwarteng are now facing a severe economic crisis as the world’s financial markets wait for them to make policy changes that they and the Conservative party will find unpalatable,” the Eurasia analysts wrote.

The foreign investors who keep the British economy solvent are left scratching their heads for another eight weeks, leaving plenty of time for doubts to surface again about the UK government’s commitment to responsible fiscal policymaking.

“The message of financial markets is that there is a limit to unfunded spending and unfunded tax cuts in this environment and the price of those is much higher borrowing costs,” Carney said.

That leaves the Bank of England in a tight spot. A week ago it was pressing the brakes on the economy to take the heat out of price increases, even as the government tried to juice growth. The task got even harder this week when it was forced to dust off its crisis playbook and bail out the government.

It may not be long before it has to intervene again, this time with an emergency rate hike.

“[Wednesday’s] intervention is designed to stabilize UK government bond prices, keep the bond market liquid and prevent financial instability but that won’t necessarily stop sterling falling further, with its attendant inflationary consequences,” Bean, the former central banker, told CNN Business.

“I think there is still a good chance they will need to act ahead of the November meeting,” he added.

— Julia Horowitz, Luke McGee, Anna Cooban, Rob North, Livvy Doherty and Morgan Povey contributed to this article.

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September 29, 2022
There’s a 98% chance of a global recession, research firm warns | CNN Business

New York
CNN Business
—

Warning lights are flashing in the global economy as high inflation, drastic rate hikes and the war in Ukraine take their toll.

There is currently a 98.1% chance of a global recession, according to a probability model run by Ned Davis Research.

The only other times that recession model was this high has been during severe economic downturns, most recently in 2020 and during the global financial crisis of 2008 and 2009.

“This indicates that the risk of a severe global recession is rising for some time in 2023,” economists at Ned Davis Research wrote in a report last Friday.

As central banks ramp up their efforts to get inflation under control, economists and investors are growing gloomier.

Seven out of 10 economists surveyed by the World Economic Forum consider a global recession at least somewhat likely, according to a report published Wednesday. Economists dialed back their forecasts for growth and expect inflation-adjusted wages to keep falling the rest of this year and next.

Given surging food and energy prices, there are concerns that the high cost of living could lead to pockets of unrest. Seventy-nine percent of the economists surveyed by the World Economic Forum expect rising prices to trigger social unrest in low-income countries, compared to a 20% expectation in high-income economies.

Investors are also getting more concerned, with the Dow Jones Industrial Average sinking into a bear market Monday for the first time since March 2020.

“Our central case is a hard landing by the end of ’23,” billionaire investor Stanley Druckenmiller said at the CNBC Delivering Alpha Investor Summit Wednesday. “I will be stunned if we don’t have a recession in ’23.”

Even Federal Reserve officials have conceded there is a growing risk of a downturn.

Still, there are clearly bright spots, especially in the United States, the world’s largest economy.

The US jobs market remains historically strong, with the unemployment rate sitting near the lowest levels since 1969. Consumers continue to spend money and corporate profits are sturdy.

There are also hopes that the worst US inflation in 40 years will cool off in the coming months as supply catches up with demand.

The Ned Davis researchers said that although recession risks are rising, its US recession probability model is “still at rock-bottom levels.”

“We do not have conclusive evidence that the US is currently in recession,” the researchers wrote in the report.

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September 28, 2022
Britain’s ‘profound economic crisis’ gives Rishi Sunak only unpleasant choices | CNN Business

London
CNN Business
—

Rishi Sunak, Britain’s third prime minister in seven weeks, took office on Tuesday with a pledge to fix the “mistakes” of predecessor Liz Truss and tackle a “profound economic crisis.”

The task won’t be an easy one, he acknowledged.

“This will mean difficult decisions to come,” Sunak said in his first speech from No. 10 Downing Street.

The United Kingdom was already sliding towards a recession when Truss took office in September, as soaring energy bills ate into spending. Now, Sunak has another headache: He must restore the government’s credibility with investors after Truss’ unfunded tax cuts sparked a bond market revolt, forcing the Bank of England to intervene to prevent a financial meltdown. Borrowing costs, including mortgage rates, shot higher.

Accomplishing this goal will require delivering a detailed plan to put public finances on a more sustainable path. (A government watchdog warned in July that without major action, debt could reach 320% of the UK’s gross domestic product in 50 years.)

The problem? There’s little appetite for government spending cuts after years of austerity in the wake of the 2008 global financial crisis. Plus, failing to help households deal with surging living costs could prove politically devastating and further weigh on the economy.

“It’s not a particularly pleasant economic hand to be dealt [as] a new prime minister,” said Ben Zaranko, a senior research economist at the Institute for Fiscal Studies.

Finance minister Jeremy Hunt got the ball rolling last week when he reversed £32 billion ($37 billion) in tax cuts that formed the bedrock of Truss’ plan to boost growth.

Yet Sunak and Hunt — who will stay in his job — still need to find between £30 billion and £40 billion in savings to bring down public debt as a share of the economy in the next five years, according to calculations by IFS, an influential think tank.

“It is going to be tough,” Hunt said in a tweet. “But protecting the vulnerable — and people’s jobs, mortgages and bills — will be at the front of our minds as we work to restore stability, confidence and long-term growth.”

Sunak and Hunt won’t have the option of going light on the details. If investors don’t buy into their plan and borrowing costs shoot up again, getting the situation under control would only become trickier, as interest payments on government debt rise.

“If markets don’t [see] the plans as credible, then filling the fiscal hole could become even harder,” said Ruth Gregory, senior UK economist at Capital Economics.

One area Sunak may be tempted to tap is the social welfare budget. Questions have swirled about whether the Conservative government may try to avoid boosting state benefits in line with inflation, as is customary. (American recipients of Social Security will receive the biggest cost-of-living adjustment in more than four decades next year.)

Most UK working-age benefits would typically go up by 10.1% next April based on inflation data. But there’s speculation the increase could be linked instead to average earnings, which are growing at a much slower rate than inflation. That could save £7 billion ($8 billion) in 2023-24, according to IFS.

Such a move would prove controversial, however — especially since benefits have not kept up with rampant inflation in 2022.

“I would like to see if we could find a way to increase benefits by inflation, but what I will say is that trade-offs are involved,” former Conservative cabinet minister Sajid Javid told ITV this week.

A more palatable option, at least for households, would be extracting more taxes from corporations.

Hunt has already said that corporate taxes will rise from 19% to 25% next spring. The Financial Times has reported that Hunt could also target earnings from oil and gas companies by extending a windfall tax on profits.

In an interview with the BBC earlier this month, Hunt said he was “not against the principle” of windfall taxes and that “nothing is off the table.” Higher taxes on the financial sector are also under consideration, according to the Financial Times.

Industry groups are already circling the wagons. Banking trade association UK Finance said its members already pay “a higher rate of taxation overall than any other sector,” and urged the government not to “risk the competitiveness of the UK’s banking and finance industry.”

Sunak could also walk back Truss’ commitment to boosting defense spending to 3% of the economy by 2030, though that carries its own political risks given Russia’s war in Ukraine. Other countries in the region, such as Germany, have said they will ramp up military investments, and the United Kingdom may be loath to fall behind, Zaranko said.

Investors and economists expect that the government will announce a mixture of tax increases and spending cuts shortly. Hunt is due to reveal his plans in greater depth on October 31.g

“Despite the fiscal U-turns, the government will still need to show a fiscally credible path next week in the budget to balance the books,” Sonali Punhani, an economist at Credit Suisse, said in a note to clients this week.

That could exacerbate the country’s downturn. The Bank of England has projected that the United Kingdom is already in a recession, and a gauge of business activity in October slumped to its lowest level in 21 months.

“We are seeing quite a dramatic shift in the fiscal outlook from being much looser than we expected just a few weeks ago to being much tighter than we expected,” Gregory of Capital Economics said. “I think the risk is that the recession is deeper or longer than we expect.”

A weaker economy would present its own complications.

No one wants to repeat the errors of the brief Truss era, when her gamble that unfunded tax cuts would jumpstart growth backfired spectacularly.

But business groups are warning that completely abandoning the objective of boosting Britain’s anemic economic growth would create problems, too.

The austerity of the 2010s produced “very low growth, zero productivity and low investment,” Tony Danker, head of the Confederation of British Industry, told the BBC on Tuesday.

“The country could end up in a similar doom loop where all you have to do is keep coming back every year to find more tax rises and more spending cuts, because you’ve got no growth.”

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December 31, 1969