How CFOs should be thinking about the economic landscape

It’s a bit of pick your poison with a splash of choose-your-own-adventure. Either way, the state of the economy right now depends on how you slice it.

“There are so many different ways you can read the current economy,” Emily Mandel, senior economist at Moody’s Analytics, told CFO Brew. “It’s not that one’s right or one’s wrong, it’s just that people are experiencing the current economy very differently, and how much people weigh the different risks that we’re seeing is also informing their view of current conditions.”

For CFOs, it’s a matter of knowing which issues to watch the most closely, and determining just how they’ll impact your firm. Below, Mandel walks us through some of the biggest issues and how CFOs might react to them.

Tell it to me Strait. If there’s an issue every CFO should probably be losing some sleep over, it’s the war in Iran and blockage of the Strait of Hormuz, which Mandel dubs “one of the biggest supply shocks we’re confronting,” particularly in the near-term.

“The longer this conflict lasts, the stickier this impact on prices is going to be,” she said at the CFO Leadership Council’s spring conference in June, noting the sharp impact on oil prices. “The thing about oil production is you can’t just turn it on and off at the drop of a hat. The longer it stays down, you have to shut off this production, because you don’t have the space to put these barrels of oil.”

Mandel’s baseline assumption for economic projections was that the Strait would reopen sometime around the July 4 holiday. Shipping traffic is still far below normal, and many ships remain stranded. “Even the baseline…there’s still a continuing drag [on prices] from the conflict versus where we were at before,” Mandel noted.

Special K. One of the other “biggest dynamics to watch,” in Mandel’s telling? Our good ol’ friend: the K-shaped economy. “From a CFO’s perspective, it’s really going to depend on who they’re selling to,” she said.

“If you’re selling luxury goods, maybe you’re going to care a lot more about how the stock market plays out,” she said, adding that “there is a potential stress on high income [consumers], just in terms of how much their wealth has been inflated by these stock market gains over the past few years.”

Meanwhile, if your business targets lower-income consumers, that’s a cohort that has “been a lot more exposed to these higher energy costs, they’ve been exposed to higher vehicle costs, higher housing costs, and so there just isn’t a lot of firepower left there,” Mandel said. “There isn’t a lot of flexibility left there in order to buy more discretionary goods or spend on discretionary services.”

As a result, the pricing power dynamics that once benefited companies will likely shift, Mandel said, “especially when you think about these lower-income households; they have already been dipping into savings.”

“Businesses as a whole have had a really strong run as far as profitability. They’ve really been able to boost their margins, and they’ve made out quite well over the [past few] years,” she added. “Thinking about that pressure on their customers…that’s going to be one of the main challenges to navigate over the coming year.”

Confidence boost. Despite it all, CFOs are feeling relatively confident.

Two recent CFO surveys—from Deloitte as well as Duke University and the Federal Reserve Banks of Richmond and Atlanta—revealed impressive CFO confidence in their own prospects.

The Duke-Fed survey found that 57% of CFOs expected demand for their goods and services to increase in the next 12 months, while almost all CFOs polled by Deloitte were “significantly or somewhat more optimistic about the future financial prospects for their company.”.

Mandel thinks the confidence “speaks to this environment,” with CFOs focused on the problems within their control. “If I were to speculate, which is purely what this is, [CFOs] feel like they have more control, more levers they can pull around their own company’s performance, rather than thinking about all of this overwhelming uncertainty in the economy as a whole,” she added.