Hi everyone! Happy New Year and welcome to the February installment of The Economy Explained, with Gusto!

The job of the Gustonomics team is to make you smart about the economy to your clients, who we know are asking you questions about what they should do. In this video, we’ll talk about what’s happening in the economy, what that means for businesses, and what to keep an eye on in the coming months. You can also download the The Economy Explained one-pager to share.

The big picture is mostly positive news from last time, but moderately so. The chances that the economy falls into a hard recession are lower than three months ago, and the possibility of a “soft landing” – where economic activity slows down but doesn’t turn negative – has been somewhat revived. 

That good news is due to some good month-on-month progress on the inflation rate – which is supporting consumer confidence and spending – and some improvements in supply chain delays and disruptions – which are helping to bring down costs. The continuing tight labor market and robust jobs availability are fueling optimism that the US can cool the economy but avoid a hard recession. Job openings and hiring have also slowed, making it a bit easier for businesses to find good talent. 

But, there are some headwinds. Inflation and supply chain disruptions are easing, but they’re still high and affecting many businesses’ costs and ability to operate. Hiring has slowed and pay raises are beginning to stabilize across the board, but it’s still tough to find great workers. And, interest rates are making the financing environment difficult for companies. 

What does all this mean for businesses in the next few months? 

The advice for companies that you can think about with your clients in the coming months is:

  1. Build the team they’ve hired. Most companies are at replacement hiring now, not expansion hiring. Talent is going to be scarce a while longer, so investing in the new people that have come on since last summer will be key to building the workplace culture and keeping them in their jobs as long as possible. 
  2. To get around the continued talent shortage, keep searching for efficiencies or ways to become more agile by looking at contractors, remote talent – both at home and abroad. Cultivating relationships with people who understand the business and who can be relied on time and again without the long-term commitment will probably pay off in the coming months. 
  3. Build working capital to manage cash flow spikiness without turning to borrowing if possible. Residual supply chain issues and prices that continue to rise – although not at last year’s rates – will make the need for working capital, but rising interest rates will make borrowing more expensive. So avoid it if you can. You can help clients by helping them find efficiencies in their cost structure, increasing retained earnings, or applying tax credits to payroll tax liabilities. 
  4. Building on that third point, help your clients decide if they can afford to delay major investments until financing conditions are more favorable

Overall signs are generally trending positive for the possibility of a soft landing, or a very mild recession in 2023. And though this is good news, the environment for businesses may not feel like it’s improving fast enough for businesses’ comfort, even as many businesses are more optimistic this quarter compared to the last. 

These are unusual times, and anything could happen. But based on the data today, the advice for businesses for you to think about with clients is to hold the ship steady, build reserves and delay any major investment expenses if possible, and re-focus talent activities towards culture, engagement, and retention to build a high-performing culture capable of withstanding whatever is ahead. 

And that’s the Economy Explained with Gusto for February 2023. 

Gusto partners can access additional one-pagers in Gusto Pro for 18 industries and 32 metro areas, and find company-specific data using People Analytics to tell the full people-story for their clients. 

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Thanks and see you all next time!

Liz Wilke is a Principal Economist at Gusto, researching the state of work and business in the modern economy. She is a veteran of both the technology and government sectors, where she directed research programs and public spending that supports dynamic, resilient companies and workers across the globe. Liz currently lives in Washington, D.C.
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