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JPMorgan Chase Survey Shows Less Optimism

ECONOMY: Most Business Leaders Expecting Recession in ‘23

California’s business leaders are less optimistic about their regional economy than other areas of the country, with 28% of respondents expressing optimism compared to 39% nationally. That is according to the results of the JPMorgan Chase Business Leaders Outlook survey of small and mid-sized business owners from across the nation, which was released January 5.

The findings in the report show that 72% of California mid-sized business leaders – the only category broken out state-by-state in the report – expect a recession in 2023, 7% above the national average of 65%.

Aaron Ryan
San Diego Region Manager, Middle Market Banking & Specialized Industries
JPMorgan Chase & Co.

Aaron Ryan, San Diego Region manager for Middle Market Banking & Specialized Industries at JPMorgan Chase, attributes California’s increased pessimism and heightened expectancy for recession on its number of industries that are more sensitive to rising interest rates and the fact that those markets may already be experiencing downturns in their sectors.

“Most notably, the residential real estate industry has undergone a meaningful drop in year-over-year sales in almost every market across the country.” he said.  “Commercial real estate has remained resilient, but as leases roll, and if vacancy spikes as it has in specific markets combined with the higher borrowing costs will create havoc for leveraged investors.”

California’s large tech sector is also a factor in the survey’s less optimistic results, according to Ryan, because of falling stock prices that fell over the last year “as valuations across high growth tech is down meaningfully” and a number of companies have announced “high profile layoffs.”

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“These dynamics could point towards why there is lower optimism in the state,” he said, adding that employment in California is also slightly higher than the national average, though still relatively low at around 4%.

The expectation of a downturn in California has led business leaders to pass some of their inflationary costs onto consumers and buyers. According to the survey, 71% of California businesses have passed at least some increased costs onto consumers and buyers, compared to 83% of businesses nationally. That is also the outlook for the year ahead, as 77% of California businesses reported they are likely to continue to increase prices to mitigate costs, compared to 82% nationally.

“The strategy to raise prices usually coincides with a belief that consumer demand and spending wherewithal is enough to accept and pay the higher prices,” Ryan said. “If business leaders in California are less optimistic around the economy than the national average, it makes sense they might be less confident to raise prices further.”

Optimistic on Revenue

Despite a majority of business leaders expecting recession, more than half of businesses (65% in California, 66% nationally) are optimistic about their own company’s performance in 2023. That optimism is even more profound for California businesses when it comes to profitability and sales — 57% of California business leaders expect their profits to increase and 65% expect their revenue/sales to increase in the year ahead, compared to national figures of 51% and 63%, respectively.

“California is seen as an engine of innovation and a market for risk-taking by its business leaders,” Ryan said. “So it’s conceivable that despite certain headwinds throughout the economy, the state’s businesses are sticking to strategies that drive revenue growth.”

Ryan pointed out that in the Business Leaders Outlook survey, 51% of California based respondents plan to introduce new products or services over the next year and 40% plan to expand their geographical footprint. Another 30% are planning mergers and/or acquisitions, despite the “dismal year” that M&A had in 2022.

“Even if optimism is down in California, its leaders are still pursuing growth strategies for their businesses,” he added.

As for the global economic outlook, California business leaders are in lockstep with the nationwide average of only 8% expressing optimism.

Jobs, Wages, Hiring

Job seekers in California may also have a harder time than in other states, according to the survey.

In California, only 42% of business leaders expect to increase their headcount over the next 12 months, compared to 50% nationally.

Wage growth in the state is also expected to lag the nation figure. To hire and retain employees, 55% of midsize businesses in California plan to increase wages and/or benefits and 33% plan to offer upskilling and training opportunities, compared to national figures of 67% and 43%, respectively.

“This is likely related to the less optimistic economic outlook held by California business leaders, which could mean less demand for workers and therefore less of a need to raise wages to attract and retain them,” Ryan said.

To view the entire 2023 JPMorgan Chase Business Leaders Outlook survey, visit tinyurl.com/ykp8kb3u

JPMorgan Chase & Co.

Founded: 2000
CEO: Jamie Dimon
Headquarters: New York, New York
Business: Global financial services firm
Stock: JPM (NYSE)
Revenue: $123.4 billion (2022)
Employees: Over 250,300
Website: www.jpmorganchase.com
Notable: With a balance sheet total of over $3.3 trillion, JPMorgan Chase is the largest bank in the U.S.

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