Business prospects clouded by inflation

With the Census Bureau’s monthly retail sales data coming in stronger than expected on inflation, the outlook for 2023 remains clouded as certain industry sectors will underperform than others.

Two recent forecast reports show a weaker retail landscape. In their Fitch Wire report, Fitch Ratings analysts said rising unemployment, eroding consumer savings and pressure on home prices “are expected to undermine US consumer spending growth in 2023.”

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“We expect the housing and auto sectors to experience the greatest pressure on operating fundamentals in the near term due to higher financing costs weighing on consumers,” Fitch Ratings said. “Some consumer discretionary sectors such as retail may see uneven performance due to category shifts, while experiential services such as travel and entertainment should see continued healthy demand over the next year.”

Turning to US corporate performance, the S&P said in its forecast poll that the latest data “signals a weakening of optimism about the full-year outlook for US private sector corporate manufacturing in October.”

“The net balance of companies expecting higher activity was up 23 percent, the lowest since June 2020,” the report’s authors noted. “But stronger than the global average (net balance up 17 percent). The drop in expectations was largely driven by the services sector, where optimism fell to the lowest level in over two years. Manufacturers, on the other hand, were more optimistic than in June.”

What is behind the slump in business prospects? Inflation and weaker demand, of course.

“Private sector companies also noted that higher interest rates and ongoing supply chain disruptions are other factors that could hamper growth over the next 12 months,” S&P analysts said. “At the same time, a tight labor market and the challenges of finding qualified workers for vacancies were highlighted as concerns. Price pressures 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 companies willing to diversify their product offerings or transition to more competitive prices. Respondents also said “they aim to keep labor costs down to discourage companies from moving their operations overseas.”

Siân Jones, senior economist at S&P Global Market Intelligence, said US private sector companies “remained cautious on their expectations for next year’s output in October as the impact of inflation and subdued consumer demand weighed on sentiment. Less optimistic forecasts for activity, employment and investment stemmed from lower optimism among service providers. Overall, confidence was at its weakest since the first pandemic lockdown period in mid-2020.”

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