Biggest Risks and Threats Facing Businesses in 2023

Biggest Risks and Threats Facing Businesses in 2023

As we enter 2023, we wanted to take a look at what we at Blue Chip Partners think will be the biggest risks and threats that many businesses could be faced with as the year unfolds.

In our view, the biggest threat that companies and organizations will face in 2023 is persistent strength in the labor market. Overall inflation and its impact on company profitability has been the focal economic aspect of 2022. While goods inflation has shown signs of continued moderation, wage inflation remains robust as companies and organizations simply cannot find the talent they need to staff their businesses.

• There are 10.46 million total domestic job openings, which equates to nearly 50% more job openings than seen in February 2020 pre-pandemic
• The labor force participation rate remains stubbornly low due in part to “the great retirement” experienced during the pandemic, today at 62.3% vs. the 62.9% on average seen during the 5 years before COVID took hold
• Layoffs in technology have gathered headlines, but this space accounts for a small share of aggregate employment and has experienced many spikes in layoffs over the last 20 years that were not reflective of economywide trends
  • Overall, layoffs remain incredibly muted, and are over 30% lower than experienced in February 2020
  • Further, workers who do become unemployed are still finding new jobs at a healthy pace
• Finally, all of these factors contribute to average hourly earnings increasing 4.6% year-over-year, emphasizing that companies and organizations have to pay up to attract talent that will operate as the fuel for their growth

*All statistics above are sourced from the U.S. Bureau of Labor Statistics.

The bottom line is that continued disconnect between supply and demand in the labor market will cause significant profitability headwinds in 2023. If not managed appropriately, financial results for domestic firms have meaningful potential to surprise to the downside. Navigating this type of environment requires companies and organizations to walk a fine line between staffing up to innovate and fuel growth, and dynamically allocating resources appropriately to maintain efficiency and profitability.

The second biggest threat that companies and organizations will face in 2023 is a continued shift in consumer preferences. Over the last 2.5 years, individuals have purchased goods in droves, initially because no money was able to be spent on services due to pandemic lockdowns and later because of a cash windfall (less spending from staying home and stimulus checks). More recently, the tide has turned, and spending on goods is coming back down to Earth, while spending on services has generally expanded over the last 6 months.

• For the first time since the depths of the pandemic, the ISM Manufacturing PMI recently entered contractionary territory, with major measures of activity coming in softer than expected
• More specifically, new orders experienced by manufacturers falling further into contraction territory is a major risk for companies and organizations within the cyclical sectors of our economy as we enter 2023
• On the other hand, the ISM Services PMI has shown robust expansion over the last 6 months before showing surprise weakness in December
• Of note is that the most forward-looking components – business activity and new orders – have led growth on the services side, which bodes well for companies and organizations that operate in the services arena, such as healthcare and IT services

The bottom line is that there are potential major headwinds coming in 2023 for manufacturing firms at large, specifically discretionary goods producers. With lower consumer appetite expected, companies and organizations will have to be creative in deploying resources to stoke growth in 2023. Further, as global growth broadly slows, manufacturing exporters are at risk of having demand collapse, which would have a significant impact on profitability in 2023.