We changed how we think about what kind of business we're in, which is a complete ecosystem of solutions rather than vehicle sales. The way I see it, it’s about how fast we can grow, and not about the external factors that can drive us down.
CEOs have weathered the challenges of the pandemic, having had to adapt their businesses over the past two years. Many emerged with new strategies to drive growth and transformation.
Just when it seemed there was a light at the end of the tunnel with pandemic-related disruptions subsiding, the vast majority of U.S. CEOs (91%) are convinced we are heading toward a recession in the next 12 months. Moreover, only about a third of U.S. CEOs (34%) believe this recession will be mild and short.
“Understandably, consumers were concerned we were in a recession in the first half of this year since they lost—on average—all that they gained in wages since the economy reopened and then some to inflation,” says KPMG Chief Economist Diane Swonk. “The losses the U.S. suffered in the first half of the year were not dispersed enough to qualify for what an economist terms a recession. Employment rose by 2.8 million jobs in the first six months of the year alone, double the annual pace of the 2010s,” says Swonk.
The key issues to overcome in the next 12 months are inflation, higher interest rates and a potential collapse in demand, says Swonk, noting that the Fed is opting to increase interest rates to derail inflation. Even at the risk of a slowdown, raising rates is a better option than allowing a more corrosive and entrenched inflation to take hold, which could cause a deeper recession with larger scars, she adds.
“Over the long term, the reality of a more fragmented world, punctuated by disruptions due to climate change and geopolitical risks, are the primary threat,” says Swonk. “I am hopeful about how resilient we proved to be in a pandemic. While not all was executed well, it was truly remarkable how rapidly we took technologies that had been around a long time and leveraged them to keep our economies going. This is what massive change requires.”
Companies thrive long term if they can meet customers’ expectations irrespective of the economic conditions. To do that, Bank of America has adopted the approach it calls responsible growth. “We have a straightforward strategy of serving three groups of clients—people, companies of all sizes and institutional investors—through eight lines of business. We deploy our capabilities, expertise and balance sheet to help our clients achieve their financial goals. This approach positions us well to serve our clients through all economic conditions while, at the same time, continuing to invest to support the needs of our teammates and our communities,” says Bank of America CEO, Brian Moynihan.
At Ford Pro, the division of Ford that serves government and commercial customers, new ways of working, infrastructure investments and the Inflation Reduction Act in the United States are contributing to customer growth, says Ford Pro CEO Ted Cannis.
Those factors and Ford Pro’s business model, more importantly, make Cannis confident about the future. “We changed how we think about what kind of business we’re in, which is a complete ecosystem of solutions rather than vehicle sales,” says Cannis. Taking into account its integrated solutions offering, agility and ability to scale, Ford Pro has a winning proposition despite the uncertain economic and geopolitical environment, he says. “The way I see it, it’s about how fast we can grow, and not about the external factors that can drive us down,” he says.
The economy might best be described as sending mixed signals, with historically low unemployment levels combined with declining GDP growth rates, high inflation and recession fears. In this context, inflation-proofing capital and input costs has become the second most important operational priority for U.S. CEOs (22%). These economic concerns are exacerbated by political divisions and social tensions in the U.S., capped by the suspense around the midterm elections and the regulatory environment that may come about.
How companies fare during these turbulent times depends, to a large degree, on their industries and the secular trends affecting them. Wind River, a leading intelligent systems software company that powers the next generation of mission-critical intelligent machines, is benefiting from the momentum of digital transformation in the Internet of Things, or IoT. “There are a number of secular trends that are putting wind in our sails at a time when many are experiencing significant macroeconomic headwinds,” says company CEO Kevin Dallas.
International Seaways, which provides tankers for the transportation of crude oil, is extremely susceptible to geopolitical tensions and economic cycles. Lois Zabrocky, the company’s CEO, says the altering of trade routes caused by the Russia-Ukraine war, a looming energy crisis in Europe and supply chain disruptions brought on by Chinese lockdowns and recessionary concerns are “all headlines that are linked to our bottom line.”
“Appropriately navigating a down cycle is what allows us to thrive in an up cycle when demand for seaborne transportation is high. Presently, we are in an up cycle, the value of our ships is worth far more than values two years ago, and we are reaping the benefits of our thoughtful capital allocation during the down market,” says Zabrocky.
In this season of change, with the prospect of a recession casting a shadow, CEOs continue to show a commitment to transformational growth.
KPMG Deputy Chair and Chief Operating Officer
More than three-fourths of U.S. CEOs have expected and planned for a recession. Many have adjusted their strategies to build resilience: 83% are confident in the resilience of their companies and industries over the next six months, 80% about the domestic economy and 72% about the global economy.
At the same time, the vast majority believe a recession will further disrupt their business, making it difficult to rebound from the pandemic. Eighty percent believe a recession will upend their organization’s anticipated growth over the next three years.
The top steps that companies are planning to take over the next six months to prepare for the anticipated recession are pausing or reconsidering their ESG efforts (59%) and downsizing their employee base (51%).
With the potential recession testing CEOs’ commitment to their ESG strategies, reducing investment may lead to long-term financial risks. This test comes at a time when CEOs have made significant strides in tying ESG to profitability, with 70% of U.S. CEOs saying that ESG improves financial performance, compared to 37% last year.
“It’s a classic moment of prioritizing short-term and long-term returns,” says Rob Fisher, KPMG U.S. ESG Leader. “CEOs will decide whether they will prioritize next quarter’s results or recognize that in the future there is only going to be one kind of economy—a lowcarbon economy—and investments they make now will position them not only to compete, but also to thrive throughout this transition.”
The biggest risk of not meeting stakeholders’ expectations in terms of ESG was around access to capital, with 28% of U.S. CEOs stating that letting down stakeholders in this area can lead to higher finance costs and difficulties raising funds. That’s especially relevant as credit tightens and interest rates rise.
While more than half of CEOs are considering downsizing their workforce over the next six months, 92% of U.S. CEOs expect their companies’ head counts to increase over the next three years. Swonk advises that firms work judiciously in how they execute layoffs, as higher unemployment will not likely end the demand for talent. “The aging of the Baby Boom [generation], earlier retirements, a dearth of younger workers and incidences of long COVID are all taking a toll on labor supply,” she points out.
Long term, U.S. CEOs remain positive about growth. Looking three years ahead, the vast majority of U.S. CEOs are confident about the growth of their companies (95%), industry (94%), domestic economy (93%) and the global economy (71%). About half (52%) anticipate earnings growth of 2.5% or more over the next three years.
“In this season of change, with the prospect of a recession casting a shadow, CEOs continue to show a commitment to transformational growth,” says Laura Newinski, KPMG Deputy Chair and Chief Operating Officer. “As the pandemic has shown us, the opportunity that disruption brings to transform business models and develop a future-ready foundation is unlike any other. In moments where, traditionally, many tend to pull back, CEOs can unlock new strategic growth opportunities by accelerating their investments in digital and impactful M&A deals.”
Much of the future growth will be generated inorganically, with more than half (56%) of U.S. CEOs expressing a high appetite for M&A over the next three years that will have a significant impact on their overall organization.
As a result of our merger last year in a down market, we earned our highest ever net profit in Q2 2022 when the market recovered. This merger doubled our fleet, which allowed us to realize synergies for a highly accretive deal.
“The best M&A opportunities are happening right now,” says Carl Carande, Vice Chair – Advisory for KPMG U.S. and Global Head of Advisory. “Those companies that can be strategically aggressive in this environment and participate in mergers and acquisitions are going to leapfrog their competitors and win in the long term.”
In January 2022, Aptiv announced the acquisition of Wind River for $4.3 billion. Dallas believes Wind River’s growth will be further fueled by this transformative merger. Aptiv is a global technology company focused on making mobility safer, greener and more connected. “Combining Wind River's industry-leading software, customer base and talent with Aptiv's complementary technologies, global resources and scale will realize our vision of the new intelligent machine economy,” Dallas says.
Zabrocky credits the merger of International Seaways with Diamond S Shipping for the company’s transformative growth. The deal created the second largest U.S.-listed tanker company by vessel count. “As a result of our merger last year in a down market, we earned our highest ever net profit in Q2 2022 when the market recovered. This merger doubled our fleet, which allowed us to realize synergies for a highly accretive deal,” she says.
Carande notes that asset valuations are stabilizing, as attractive assets still have interested buyers. In a depressed market, M&A activity is one way to mitigate resource scarcities. “M&A enables growth in a no-growth environment,” says Carande. “It is an opportunity to prepare for an economic rebound, as growth coming out of a recession is likely to be greater than before it.”