Bond investment giant TCW Group CEO Katie Koch heard what she wanted to hear at CNBC’s CEO Council Summit this week. It was not good news, but it corresponded to his vision of the direction the economy is taking. Koch, who described herself as coming to the CEO meeting “in the medium to hard landing camp,” said she was surprised by recent events like the Milken Global Conference where she found the leaders were, in his words, “too happy”. “
“CEOs are decidedly more negative,” she said of the length of conversations she had at CNBC’s CEO event, “and I think that’s a data point really , really important. … people are seeing real degradation, reduced incomes and job losses, so this is going to weigh on the economy.”
At the same time, she cited “a major call for global liquidity” which will put further pressure on the economy and a labor market that is “starting to crack”.
It’s a view that, while not shared exactly note for note by the CEOs of an economics panel at CNBC’s Council of CEOs summit, covered many of the well-known arguments in favor of downturn that were the subject of on-stage conversation between Wall Street CEOs of steel and logistics.
While Goldman SachsThe economic research team continues to believe a soft landing is possible for the economy, and Goldman CEO David Solomon told fellow CEOs “it’s hard to have a recession with the full employment,” he added that his own discussions with CEOs reinforce the idea that economic conditions are tightening and that is having “lag effects.”
The latest release of Fed minutes on Wednesday showed senior central bank officials split on the next interest rate move, but showing a tilt toward less aggressive policy.
Goldman’s CEO has said publicly that he has no specific calls for or against the recession, but he has said that “it’s hard to tighten up economic conditions and have inflation and not have impact on growth and some rebalancing of impacts”.
If there is a recession, Salomon says he is ready to make a prediction: it will be a “shallow one”.
But Solomon, along with other CEOs, said there is another generic factor in today’s economy that will cause whatever happens next to deviate from the economics textbook.
Tamara Lundgren, CEO of Schnitzer Steel, there are two competing forces in the economy that can be seen in the demand for metals. A central bank drive to slow the global economy, on the one hand, but a commodities industry also aligned in the longer term with what it described as “two extraordinary industrialization transitions.”
One is the transition to a low carbon economy which requires a huge amount of metals and minerals, highlighted by copper for electrification. “We rarely see this juxtaposed with high inflation and tighter credit conditions and central banks’ drive to slow growth,” Lundgren said.
The other she cited is the rise of generative artificial intelligence which will have implications for economic output and worker productivity. Nvidia shares soared as much as 25% in after-hours trading to nearly a $1 trillion valuation on Wednesday on strong demand for AI chips. Earlier in the day from the CNBC summit, venture capitalist Jim Breyer said Nvidia looked “unstoppable” over the next three years.
All of the CEOs on the panel spoke about the impact that AI and machine learning are already having on their businesses and have had over the past decade, but while Nvidia chip sales among major tech players cloud and consumer internet companies are booming, the sectors represented by CEOs at the CNBC summit weren’t yet talking about huge new investments to deploy the latest generation of technology. With the latest generative AI, Goldman is working on many use cases and experiments, but “you want to go slow and be focused and thoughtful and learn,” Solomon said.
In recent trading, the metals led by copper have dipped in a signal of concern over the global economy and the momentum of China’s recovery, but this comes amid longer-term belief that transitions , including electric vehicles in the automotive industry, will keep metal prices up. path.
“Structural demand for metals is very large,” Lundgren said, and right now competing forces are contributing to the bleak economic outlook. “With a credit crunch we would normally see some impact on construction, and we will see it in office construction, commercial construction and warehouse construction… but tempering that will be heavy construction thanks to the IRA and infrastructure bills,” she said.
The significance of this structural trend can be seen from the current debt ceiling negotiations to the geopolitical and economic rivalry with China.
China is the world’s largest user of metals and China’s economic behavior can impact demand, Lundgren said, as is currently the case, but China’s concentration of control over critical minerals became apparent to the rest of the world and at the same time led to a focus on increasing metals and mining in North America.
Citing research by Jeffrey Currie, head of commodities research at Goldman Sachs, she referred to the “revenge of the old economy” and a time when “decades of underinvestment in mining and metals” have become a major concern for the United States and other developed economies that need these materials for the infrastructure of a low-carbon economy.
“That’s why allowing reform is now such an important part of the debt ceiling, an important bargaining chip between Biden and McCarthy,” Lundgren said.
Earlier this week, Exxon Mobil announced that he was getting into national lithium mining in Arkansasthe key to the current generation of EV battery chemistry, while Italian energy giant Enel said it was investing more than $1 billion in an Italy-based solar panel manufacturing plant Oklahoma, one of the largest clean energy investments in the United States since the IRA was passed.
Need a “new name” for the recession
The latest score from the Congressional Budget Office clean energy tax breaks estimate could cost at least $180 billion more than originally projected, as business appetite for related projects is higher than expected. Goldman Sachs recently projected that the Inflation Reduction Act provisions could cost up to $1.2 trillion over the next decade, roughly three times the government’s forecast.
Lynn Martin, President of the NYSEsaid one area showing continued strength in a tough IPO market is the energy transition from traditional energy to clean energy companies.
The recent slowdown in Dow Jones trading came this week amid stalled debt ceiling talks, but CEOs at the CNBC event were more focused on the broader economic picture. Recent economic data shows that inflation is flattening, supply chains are loosening, production is slowing and demand is slowing, with consumer activity declining significantly. The consumer who’s been the most resilient, the high-end consumer, is cracking up, according to comments from Saks CEO Marc Metrick at CNBC’s CEO Council summit.
“We all see it,” Lundgren said, but she added, “you have the other driver, the infrastructure funds that go through the system…electric vehicles and battery and solar and wind, long-term structural drivers of demand,” she said.
There is a good possibility of a recession, but she added: “Whatever this recession is, we may need a new name for it. I’m not sure history has ever seen that before. “
A growing number of large industrial customers are opening manufacturing plants in North America, according to Mario Harik, CEO of the logistics company XPO, but the short-term economic situation is not easy to interpret. Inflation is normalizing, but the Fed needs to slow its rate hikes accordingly. Salaries, which had risen in the mid to high single digits last year, have now returned to “pre-pandemic salary increases”, and the cost of transport has come down “significantly”, according to Harik. , although it remains above 2021-2022 levels.
Harik said first-quarter shipments, on a yearly basis, were up despite the slowing economy, but two-thirds of manufacturers in North America and Europe are seeing “slightly weaker than expected demand.” Business picked up a bit in April, he said, and retailers still expect growth in the second half. But overall, “very mixed signals,” he said.
Solomon expects inflation to be more rigid than many people think as it hits its peak – rival bank CEO Jamie Dimon of JPMorgan Chase said this week the economy should be prepared until interest rates reach 7% – and Solomon also thinks we might need to see higher rates in order to control inflation.
He cited “some structural things going on” related to inflation that will make it difficult to “easily” get back to the Fed’s 2% target. Even if the Fed takes a break, based on what he now sees in the economy, Solomon said there is no expectation of a rate cut by the end of the year, this which has been the dominant opinion in the bond market.