Business Outlook Clouded by Inflation
As retail monthly sales data from the Census Bureau came in stronger than expected due to inflation, the outlook for 2023 remains clouded, with certain industry sectors positioned to fare worse than others.
Two recent outlook reports reveal a weaker retail landscape. In its Fitch Wire report, analysts at Fitch Ratings said rising unemployment, eroding consumer savings, and pressure on home prices “are forecast to undermine U.S. consumer spending growth in 2023.”
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“We expect the housing and autos sectors to face the greatest near-term pressure on operating fundamentals due to higher financing costs weighing on consumers,” Fitch Ratings said. “Some consumer discretionary sectors such as retail could see uneven performance due to category shifts, while experience-oriented services such as travel and entertainment should see healthy demand continue next year.”
Regarding U.S. business output, the S&P said in its outlook survey that the latest data “signaled weaker optimism regarding the year-ahead outlook for output among U.S. private sector firms in October.”
“The net balance of companies anticipating higher activity, at plus 23 percent, was the lowest since June 2020,” the authors of the report noted. “That said, it was stronger than the global average (net balance of plus 17 percent). The drop in expectations was largely driven by the service sector, where optimism fell to its lowest in over two years. Manufacturers, on the other hand, were more upbeat than in June.”
What’s behind the drop in the business outlook? Inflation, of course, as well as weaker demand.
“Private sector firms also noted that higher interest rates and ongoing supply chain disruption are further factors which could hamper growth in the coming 12 months,” the S&P analysts said. “At the same time, a tight labor market and challenges finding skilled workers for open vacancies were highlighted as concerns. Pressure on prices and muted demand conditions are also expected to lead to more intense market competition, which could also impact future growth.”
But there are opportunities for growth — for businesses willing to diversify their product offerings or shift to more competitive pricing. Those surveyed also noted “that they aim to keep staffing costs down in an effort to dissuade companies from taking operations offshore.”
Sian Jones, a senior economist at S&P Global Market Intelligence, said the U.S. private sector firms “remained cautious in their expectations for output over the next year in October, as the impact of inflation and muted client demand weighed on sentiment. Less upbeat predictions for activity, employment and investment stemmed from lower optimism among service providers. Overall, confidence was the weakest since the initial pandemic lockdown period in mid-2020.”