Key Takeaways
- All signs are pointing towards a recession occurring in 2023, but there’s a slight chance that the Federal Reserve can achieve a “soft landing.”
- The retail and manufacturing sectors are forecasted to be hit harder by recessionary pressure than other industries like real estate and food service.
- A recession provides an opportunity for procurement professionals to achieve cost savings through spend analysis, contract review, and automation.
Why are signs pointing to a recession in 2023?
As an analyst at ProcurementIQ, I often research pricing information and market outlooks for various industries. In the last year, inflationary pressure hindering sourcing opportunities has been a common theme across all markets. Rising input costs and commodity prices have added significant risk to vendor financial health and to the relationships between buyers and sellers.
Uncertain economic conditions present a major opportunity for procurement professionals. Those who can navigate the rocky market landscape will be rewarded with cost savings and stability. Those who cannot, however, will run into sourcing obstacles and profit reduction. We have already seen significant layoffs begin in several industries as businesses continue to cut back on spending.
Inflation has also dominated airways in the last two years. Between May 2020 and June 2022, the 12-month change in the consumer price index (CPI) rose from 0.1% to over 9%, which is the current peak. Fortunately, the Federal Reserve introduced interest rate hikes from 8 basis points at their lowest to over 4.3% today, which has shrunk the 12-month change in CPI in the last two months. The recent slowing of inflation has eased the problem facing millions of Americans in the past year: price growth outpacing wage growth.
Why a recession might be avoided:
- Falling inflation: As mentioned before, inflation has recently fallen from its 9% peak in June 2022. Although unlikely, inflation continuing to fall amidst tightening rates in 2023 may allow us to reach a "soft landing" of the US economy.
- Unemployment rate: The labor market in the United States is cooling down, with the number of job openings falling as firms continue to downsize to preserve profit levels. An increase in the unemployment rate can reduce discretionary spending and wage growth and is a valuable tool to combat inflation. You should know, however, that this is a tightrope act that can prolong recessions if unemployment creeps too high.
- Consumer spending: Americans reduced their spending in late 2022, which caused retailers to lower their prices for goods plagued with persistent inflation like groceries. Though the consumer spending forecast is uncertain, a reduction in spending will ease inflationary pressure, allowing the Federal Reserve to reduce rate hikes in response and lower the risk of a 2023 recession.
Which 5 industries will be most impacted by a recession?
Retail
Historically, the retail sector has been the first to feel the effects of a recession. Consumers cut back spending, businesses slash prices to retain customers, and profit margins are swiftly eroded. These effects are forecasted to amplify amidst high input costs and lead times. For example, pulp and paper prices reached all-time highs in the last three months, significantly increasing retail shipping costs. ProcurementIQ estimates an 18.8% compound annual growth rate for Paperboard & Packaging Papers between 2020 and 2023. In the next few months, retailers must decide to preserve price levels and lose customers or cut prices and reduce profit levels due to lower purchasing volume.
Manufacturing
The manufacturing sector was hit hard during the coronavirus-induced downturn beginning in April 2020, with the US manufacturing Producer Price Index (PPI) growing by over 27% since. Commodities used in all sectors soared in price over the period, and even after recent declines prices remain above pre-pandemic levels. In addition to rising input costs, soaring gasoline and diesel prices have increased shipping and freight costs for manufacturers in late 2022 and early 2023. If consumer spending falls in the next few months, the sector will feel the combined effect of reduced demand and high input costs, severely reducing profit outlooks.
Travel and Tourism
Similar to the retail sector, the travel and tourism industry is typically the first to feel a reduction in spending during a recession. However, the coronavirus-induced pandemic created pent-up demand for travel that has maintained profit levels since domestic and international travel reopened in 2022. According to the U.S. Travel Association, travel spending continues to outpace pre-pandemic highs seen in 2019. Based on this data, the travel and tourism sector is better equipped than most to handle the projected 2023 recession.
Real Estate
The real estate market has undergone steady growth since the recovery from the 2008-2009 financial crisis but is now experiencing rapid growth since Q2 of 2020. Low interest rates, generous fiscal policy, and a favorable economic outlook were the key contributors to the exponential rise in home prices. Unsurprisingly, the recent tightening of interest rates has cooled the market in recent months. Major cities like Seattle have experienced a decline in median home prices that has continued into 2023. Worsening economic conditions are shifting real estate into a buyer’s market, as low demand for homes is causing sellers to reduce listing prices in order to make sales.
Restaurants
Restaurants are notorious for operating on thin margins and are highly susceptible to reduced profits during economic downturns. According to the National Restaurant Association, over 85% of restaurants raised menu prices in the last year to preserve profits. In addition to food costs, rising wages and high energy costs have also contributed to financial instability in the market. If consumer spending towards eating out falls, over half of the restaurants nationwide are fully prepared to begin layoffs. However, the restaurant industry remains strong with hundreds of thousands of job openings nationwide at the time of publishing this article.
What should I do if my business will be impacted by the recession?
Procurement can take the following steps if your business is likely to be affected by recessions.
- Conduct spend analysis: Procurement professionals should refresh their knowledge of analyzing procurement spend. Procurement professionals who can better utilize spend analysis gain increased cost savings and higher profit levels.
- Review contracts: Procurement pros should review existing contracts to discover if there are opportunities to negotiate pricing, payment terms, and delivery schedules. Contract review also helps to mitigate risk stemming from prior contractual obligations.
- Identify alternative suppliers: Access to alternative suppliers provides several benefits to procurement professionals. Procurement organizations benefit from increased negotiation leverage as they can walk away from a deal if contract terms are unfavorable. Additionally, supply chain resilience is bolstered, especially in recessions.
- Utilize automation/AI: When procurement teams integrate AI capabilities, employees can shift from focusing on monotonous tasks to higher-level, more complex tasks. This change in employee responsibility increases cost savings, boosts productivity, and encourages employee satisfaction compared to an entirely manual process. AI also assists procurement pros in navigating recessionary landscapes in real time.
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