September 22, 2022

All eyes are on the economy as business leaders wait to see if the Federal Reserve will push the U.S. into a recession or pull off a soft landing. Opinions about the outcome are somewhat mixed—Oxford Economics predicts a “mild recession” come 2023; Goldman Sachs says the U.S. remains on a “narrow path” to a soft landing; and TD Securities puts the chance of a recession at 50% in the next 18 months.

“Some economists think there isn’t going to be a recession but few of them say it’s going to be a terrible one,” said NACM Economist Amy Crews Cutts, Ph.D., CBE. “The more difficult question to answer is what a post-pandemic recession will look like.”

As a general rule, a recession is defined as two consecutive quarters of decline in gross domestic product (GDP)—and the U.S. economy hit the mark by contracting in the first six months of 2022. The yield curve, another indicator that has preceded nearly every financial crisis, is at its steepest inversion since 2000. The yield on the two-year Treasury bond pushed further past the 30-year yield last week. But the National Bureau of Economic Research (NBER) traditionally makes the final call of a recession.

“I certainly don’t think that some of the traditional recession indicators will hold as much weight as in the past,” Cutts explained. Here’s what five popular indicators are signaling:

Consumer Price Index (CPI)

Rising inflation can increase the likelihood of a recession, and prices remain near a record high. The latest CPI reading came in at 8.3% in August year over year, slightly down from the month prior. But strip away volatile food and energy prices, and core inflation rose 0.6% from July to August.

“Many firms had to raise prices because their costs have gone up and some companies are buying maybe a higher dollar amount but fewer units because of those higher prices,” Cutts said.

Credit Managers’ Index (CMI)

The CMI was one of the first indices to flash warning signs prior to the Great Recession. The August CMI reading is at 55.0, still five points above contraction territory, but has been on a steady decline. The monthly survey asks participants to rate factors in their monthly business cycle—such as sales, accounts placed for collection and dollar amount beyond terms.

“For me, dollar amount beyond terms and delinquencies are the biggest recession indicators within the CMI,” Cutts said. “30 days beyond terms is your canary in your coal mine situations, but 60-90 days become a bigger deal. Some survey respondents have indicated that they are starting to have some trouble getting paid by customers who were good at paying in the past. The sales category in the CMI is another to watch as customers cut back on orders.”

Unemployment

Economists often look to the unemployment rate as a sign of economic distress. The current labor market remains strong, but is a lagging indicator, Cutts said. “Several of my economist friends are scratching their heads because the labor market is so tight right now with the number of openings far exceeding the number of unemployed people. The labor market is strong, so will we have layoffs like we normally have during an economic crisis or will openings just go unfilled?”

The U.S. unemployment rate is at 3.7%, with roughly 372,000 jobs added back in June. “Women are finally coming back into the labor market,” Cutts said. “The majority of women were employed in the service industries but due to the pandemic, many were taken out as caregivers.”

Housing Market

The housing market, however, is showing significant stress in the U.S. economy. 30-year mortgage rates passed 6% last week for the first time since 2008, according to the Mortgage Bankers Association. Builder confidence declined for the ninth straight month in September, falling to its lowest level since 2014 with the exception of Spring 2020, according to the National Association of Home Builders.

“When the economy gets overheated, the [Federal Reserve] starts to raise interest rates,” Cutts said. “High interest rates negatively affect commercial construction and we’re seeing it in the numbers for both home and non-residential.”

Supply Chains

The supply chain is a fairly new factor to watch as we teeter an economic downturn. “The problem is supply keeps getting hit with various shocks,” Cutts said. Supply chain backlogs play a major role in bolstering inflation. As the Federal Reserve aggressively raises interest rates to combat inflation, it does not have the ability to relieve supply chain congestion.

Supply chains also change customer buying patterns. “It’s one thing that a company did double orders a few months ago but when companies may do more just-in-time ordering, they are worried that sales on their end are going to diminish,” Cutts said.

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Construction input prices decreased 1.4% in August compared to the previous month, according to an Associated Builders and Contractors analysis of U.S. Bureau of Labor Statistics Producer Price Index data. Nonresidential construction input prices fell 1.4% for the month as well.

Construction input prices are up 16.7% from a year ago, while nonresidential construction input prices are 16.3% higher. Input prices were up in six of 11 subcategories on a monthly basis. Natural gas prices increased 35.3% (and are 457.9% higher than they were in February 2020), followed by unprocessed energy materials prices, which rose 13.5%. Crude petroleum prices were down 5.3% in August.

“Until the recent Consumer Price Index report, investors and other market-watchers had been delighted by recent inflation news,” said ABC Chief Economist Anirban Basu. “The Producer Price Index report supplies additional evidence that wholesale inflation is edging lower from the highs observed earlier this year. While this may create a sense of relief among contractors, this is no time for complacency.

“With COVID-19 lockdowns persisting in China, the world's leading manufacturer, and Europe facing severe energy crises, supply chain disruptions will persist,” said Basu. “That suggests that construction materials and equipment prices are likely to remain elevated even if year-over-year price increases moderate. Public construction workers remain in short supply, including in the category of public construction. The upshot is that inflation is poised to remain stubbornly high even as some begin to declare victory. Estimators and others in the construction industry should be on guard for occasional surges in inflation during the months ahead.”

Based on ABC's Construction Confidence Index and Backlog Indicator, many contractors expect to pass along their cost increases to project owners during the months ahead, said Basu. “Some contractors may be in for a rude surprise. With borrowing costs rising and risk of recession elevated, it is perfectly conceivable that project owners will become increasingly resistant to elevated charges for the delivery of construction services. Based on nonresidential construction spending data, that process has already begun. Accordingly, contractors should remain laser-focused on cashflow and weeding out costs as opportunities arise.”

When it comes to assigning workload to collectors, one size does not fit all. It is a process determined by department size, industry type and department goals. According to a recent eNews poll, 42% of collectors are assigned workload based on their skillset, like ability to speak several languages and handle complicated relationships. 29% of credit departments assign workload by customer location, and 16% by a certain number of customers.

While there is no simple answer for the best way to assign workload, asking yourself certain questions will help guide you in the right direction. “The way you assign workload to your collectors is going to be industry specific. For example, we are in the metals industry so we are shipping massive pieces,” said Kenny Wine, CCE, director of credit-South/East, Joseph T Ryerson & Son, Inc. (Little Rock, AR). “Because of that, we don’t have a lot of deductions—it’s just one invoice and one item with a large dollar amount. So, assigning workload based on number of customers or location is fair.”

But in the construction industry for example, a credit analyst is likely to spend a lot of time filing liens, which take away from time wearing the collections hat. The same goes for the cosmetics industry where credit professionals may need to spend more time handling deductions and disputes rather than collections. “If you are having trouble deciding how to break up the work, my best advice is to benchmark against similar industries and companies with similar characteristics,” Wine said. Try working backward from your department’s goals, he added. “We want our company to be around 82% current, so that means we want our collector’s workload to be 82% current. That would mean 18% of the portfolio is not paid on time and those are the people they would need to call on a daily basis.”

So, for Wine’s credit department, if a collector has 500 accounts at 82% current, 90 of those are past due. Of those 90, maybe 30 always pay a few days late. But for the rest, the analyst needs to make about 20 phone calls a day or two an hour.

Wendy Mode, CCE, CICP, division credit manager at Delta Steel, Inc. (Cedar Hill, TX) assigns workload alphabetically and divides them based on the month’s aging. “I split the alphabet based on number of accounts and dollar value, then I split them between my two collectors, so one is either on open terms or COD type accounts,” Mode said. She also has one collector that works on accounts that require special payment portals, like Ariba.

On the other hand, Frank Beahm, CBA, CICP, credit manager at Ping, Inc. (Phoenix, AZ) assigns workload quite differently. “Over the last 30 years, with golf being a regional, seasonal sport, we found it’s easier to go by the last digit of the account number, which gets assigned to a queue group off of the collectors.”

Marlene Groh, CCE, ICCE, multi-regional credit manager at Carrier Enterprise LLC (Salisbury, NC) has a unique way of assigning workload. “We’re different in the sense that we have over 70 branches to cover. So, we split first by branch and then we split by dollar amount.”

Groh’s credit department has teams for small and large accounts. The small accounts team is transaction-based—focused on sending out notices and electronic communication. The large accounts team is relationship-based—focused on understanding the customer and building rapport. “Those are the accounts we tend not to put on hold as much. For the smaller accounts, if they’re not current, we kind of hold them to get payment out of them,” she said.

Another way of assigning workload is by sales representative, much like how Tami Behner, CCE, credit manager at Barnsco, Inc. (Dallas, TX) does for her credit department. “The way we assign accounts to collectors is based upon the sales rep, so that way we can collect what we need,” she said. “The collector develops a rapport with the sales rep because sales and credit really go hand-in-hand in order to get the accounts collected.”

Behner says finding the right way to assign workload is a bit of trial and error. She has tried other methods in the past, like assigning alphabetically or by region, but found assigning workload by sales rep works best. “Plus, it makes it easier on the sales rep since they know exactly who they go to,” she said.

Keep an eye out for next week’s eNews to learn about when it might be time to hire a new collector.

Some employers can attract a large pool of job applicants without having to offer higher wages. We call such employers with significant labor market power dominant, and they’re prevalent in many parts of the U.S., especially rural areas.

Dominant employers are much more likely to respond to rising interest rates by firing workers because they can more easily hire back when the Federal Reserve starts lowering interest rates, our new research shows. Less educated workers in poorer regions tend to be most affected because dominant employers are relatively more prevalent in poorer regions.

These findings are especially important amid the fastest interest rate increases in a generation. Elevated inflation is prompting the Fed to act, which will affect employment as businesses reduce investment and payrolls and consumers spend less. In this period of rapid inflation, Fed tightening is appropriate in pursuit of its dual mandate of maximum employment and price stability.

Our work suggests that the unemployment rate—which recently reached a half-century low—is now likely to rise, in part because of the role that dominant employers play in the U.S.—and that in turn would exacerbate inequalities between regions.

Defining Dominant Employers

Our study relies on data from Lightcast, formerly Burning Glass Technologies Inc., a major provider of real-time U.S. labor market data.

To create a new definition of dominant employers, we use the share of vacancies controlled by any given employer in U.S. regional labor markets. Dominant companies typically account for almost 10% of open positions in their regional market.

The data also shows that dominant employers are mostly located in less densely populated areas of the U.S., especially in rural areas, where incomes tend to be lower and job-seekers have fewer employers to choose from. Dominant employers are disproportionately in industries like healthcare, agriculture and mining.

Having defined dominant employers, we study how their hiring decisions have varied in response to monetary policy surprises—unexpected interest rate hikes or cuts—over the last 10 years.

The analysis shows that dominant employers are more responsive to changing interest rates—they cut back on vacancies much more when rates are rising relative to other employers. Using firm-level data, we confirm that fewer vacancies in turn reduce employment. These effects are particularly important for less educated workers and those with limited IT skills because they cannot easily find new jobs. On the other hand, the analysis shows that all employers cut wages when interest rates are rising, and dominant employers are not different in this regard from other employers.

Why would dominant employers fire workers when interest rates go up? When interest rates rise, demand for products decline, production costs rise and the need for workers is reduced. Because dominant employers can usually hire more easily, they are more likely to fire staff.

Implications for Taming High Inflation

To bring down inflation, the Fed needs to raise interest rates. It is, however, difficult to do so without creating higher unemployment. Historically, small increases in the jobless rate have reduced wage and price pressures significantly, but more recently, this relationship has weakened.

Our findings point to an important role dominant employers play in this weakening. In regions less likely to have dominant employers or those with low labor market power, even a small increase in the unemployment rate leads to a strong decline in wage growth. However, this is not the case in regions where employers have high market power—dominant employers don’t need to reduce wages because they cut costs by firing workers. In regions with dominant employers, jobless rates increase significantly more as interest rates rise.

Since regions with dominant employers tend to be poorer to begin with, rising interest rates will push unemployment up exactly where incomes are lowest. This mechanism would thus lead to an increase in inequality across and within regions as the Fed raises interest rates.

Reprinted with permission; IMF Blog.