CEOs Anticipate a Possible Recession

The 2023 EY CEO Outlook survey finds U.S. CEOs universally anticipating a recession but preparing for the unexpected. Top executive recruiters Frank Scarpelli of HireWerx, Tim Russell of  The Tolan Group, Rachel Tigges of Solomon Page, Michael Henry of Massey Henry, Darcie Murray of Mercuri Urval, Russ Riendeau of New Frontier Search Company, Craig Lapham of The Lapham Group, Ron Godier of Intalegence, Matt Kamin of Envision Consulting, and Ken Schmitt of TurningPoint Executive Search share their views!

February 8, 2023 – As 2023 starts to take shape, corporate leaders are already braced for a recession. The only mystery is what final form the downturn will take: mild or deep — and will the U.S. weather the storm better than the rest of the world? Other economic and geostrategic subplots add uncertainty to the story: Will supply chain issues continue to be a disrupter? Will the war for talent finally ease? Will a new geopolitical cataclysm, beyond the ongoing war in Ukraine, further shake global confidence? EY’s latest quarterly CEO survey found U.S. CEOs operating with certainty while leaning into the mystery. With an all-but-unanimous 99 percent expecting an economic downturn, and roughly half saying the recession will be mild domestically, CEOs were factoring this gathering storm into their strategic models and keeping their options open.

The EY report notes that deal pipelines were still notably full, but executives were deploying capital very judiciously. In this market, it’s one thing to consider inorganic growth options, but quite another to pull the trigger.

Joint Venture Intentions Higher than M&A

When it comes to mergers and acquisitions, 63 percent of EY respondents said they will pursue a deal in the next 12 months, much higher than the 46 percent globally who planned to pursue an acquisition. This fairly robust U.S. number may in part reflect a recent easing in asset valuations and may also reflect pent-up demand. U.S. deal volumes were down 16.5 percent through November from the same period a year earlier, while globally, non-financial companies had just under $2 trillion in cash and short-term instruments on their balance sheets.

Private equity companies, which have slowed their deal pace in recent months, were even more likely to pursue an acquisition, with 69 percent of PE portfolio company CEOs saying they would pursue M&A.

Across U.S. sectors, EY found that 68 percent of financial services, 63 percent of consumer products and retail, 61 percent of advanced manufacturing and mobility (AM&M) and 58 percent of technology, media and telecoms (TMT) CEOs planned to pursue M&A. “Still, with regulatory pressure mounting against megadeals in both the U.S. and Europe, M&A in 2023 may be more targeted than transformative,” the EY report said.

In fact, the more telling survey result was the considerably larger percentage of U.S. CEOs pursuing joint ventures or strategic alliances (73 percent) — arguably the less risky option. The TMT sector was among the leaders in that measure (71 percent) after lagging in M&A intention. Even divestment plans at 44 percent — a notably high percentage — suggested that many companies will sooner right size or restructure rather than bulk up. AM&M led in terms of divestment plans at 48 percent.

Overall, the EY report found that a remarkable 97 percent said hey were considering restructuring opportunities, including identifying underperforming business units for improvement or divestment. “If 2023 turns out as many expect, CEOs will have ample opportunity to get their houses in order,” the EY report said. “Talent pressure eases, but workplace flexibility remains. The talent outlook also seems to have turned a corner. Attrition rates have dropped considerably, reducing talent churn, and executives are no longer discussing the so-called Great Resignation.”

In fact, EY-Parthenon teams forecast the unemployment rate will average 4.9 percent in 2023 and peak at 5.2 percent in the third quarter, an increase from 3.7 percent in November. This loosening may be reflected in EY’s CEO survey as scarcity and cost of talent dropped among key business risks — only 12 percent considered it a primary risk — and only about one-third identified talent investment as essential to emerging from a potential downturn. However, the shift to flexible work arrangements appears to be better established: 63 percent of executives agreed that flexible working is increasingly critical to reducing employee churn and attracting new talent. Even if employees are no longer in the driver’s seat, the rules of the road have changed.

Related: Retaining Your Employees During the Great Resignation

“No two business cycles are alike,” the EY report said. “But what makes this anticipated correction particularly unusual is the stockpile of capital corporates and PE firms amassed before the U.S. Federal Reserve began laddering up interest rates to tame inflationary pressure. Combine that with still historically low unemployment and the lingering impacts of the pandemic.”

Indeed, a clear majority of executives told EY they expected this downturn to be different: exacerbated by geopolitical tensions, supply chain disruption, talent shortages and ongoing pandemic-related issues.

“Even with only a couple of those negative impacts, CEOs would have their work cut out for them navigating the contours of 2023’s business climate,” the EY report said. “Still, now is the time for companies to be poised for growth and ready to move when the time is right. The mystery at the heart of the next recession will be revealed soon enough — but to quote both a Beatles song and a recent hit movie, for now it’s like looking through a glass onion.”

Search Experts Weigh In

My expectations for 2023 are that most companies will continue to slash op-ex wherever possible; that includes headcount in anticipation of continued supply chain and geopolitical uncertainty,” said Frank Scarpelli, managing partner and chief executive officer of HireWerx. “This is especially true for organizations that dramatically increased staffing during the pandemic. Those same company executives are looking forward to 2024 and beyond to ensure they retain or acquire the talent that will allow them to maintain a foothold in their markets. HireWerx specializes in private equity in the low to mid-market. Here our observation is that more attention is being paid to strategic hires that can increase efficiencies and improve revenue in their portfolio companies.” 

“My bets are on the U.S. having a recession in 2023, albeit a milder one than in Europe,” Mr. Scarpelli said. “A few months ago, I was more bearish than I am today, given recent positive moves by the markets and unemployment figures. Regardless, most are of the mindset that we are well down the path of recession. And psychology is a very real factor. In addition, the recent layoffs, rising cost of food, and increased rent and mortgage costs only support those sentiments. As with previous recessions, we will see individuals and perhaps smaller companies move out of the search and placement industry. In a way, the industry cleanses itself of the weakest players.” 

“The best of the smaller firms will be acquired by larger firms for several reasons. To name one: diversification. Increased activity in this area is fueled partly by historical higher than average valuations and more activity by larger firms and private equity,” said Mr. Scarpelli. “So, I expect to see more M&A activity in the search sector later in the year.” 

“I anticipate a robust year this year,” said Tim Russell, managing partner of The Tolan Group. “As a team we project a 20 percent increase in search volume this year compared to last year. The sector we serve remains vigilant in hiring top tier talent to lead their organizations. Though certain dynamics are more prevalent today than in past years, the candidate market is open for business and highly sought executives are willing to listen to a recruiter who is representing a compelling opportunity.”

“I think we are already experiencing recession,” Mr. Russell said. “The proof of recession is in the math. Numbers don’t fib. High prices and fewer spending can be a source of denial but they can’t be ignored. Things are costing more these days. If one doubts that…a quick stroll down the aisles in a grocery store will confirm that to be true. Recession effects all of us though maybe not equally. Constant news of interest rate hikes and a glance at a paystub in January 2023 compared to December 2022, reveals that something like a recession is ashore.”

“One of the reasons I love the executive search business is because of the recession proof currents it possesses,” said Mr. Russell. “Arguably, as long as there are people, there will be a need for a recruiter. Potential impacts on the search sector will be felt by firms operating in certain industries. Not unlike during COVID when the hospitality, travel, and entertainment industries were hobbled due to the shutdown, certain industries will feel a drawback during these times. The tech sector, though once ‘white hot,’ is starting to cool in certain areas. Search firms who are tech oriented will see a decrease in permanent assignments but may see opportunity in the staffing realm.”

Mr. Russell also notes that the M&A activity seen in the search sector seems to remain strong. “The reasons for the M&A interest vary, but consolidating efforts of successful recruitment teams can create a strong bottom line and significant growth opportunities,” he said. “Since so many search firms operate with a boutique/specialty focus, the joining of a few firms who operate in different verticals but share similar recruitment practices can be a winning combination to profitability. Search firms scratch the most basic itch of investors – scalability, duplication, and repeat business opportunities. If managed properly, search firms are a viable investment as a platform or tuck-in and all signs point to remaining that way for the foreseeable future.”

“Looking ahead to 2023, employment will see a shift from the hiring boom experienced in the past 18 months,” said Rachel Tigges, chief marketing officer at Solomon Page. “As a result of hiring sprees in the past, hiring freezes are anticipated across multiple sectors and have already been highly publicized in some industries. Mass layoffs may not be prevalent across the board, but a refinement of needs and goals will concisely support the organization’s future plans.

“Hiring will be prioritized to thoroughly advance the organization’s needs and candidates must support the overall mission of the organization—two trends which will become essential in 2023 as companies are tightening their hiring practices,” she said. “Companies will need to remain adaptable in building a sustainable foundation that can anticipate the inevitable hiring reform that is dependent on many factors within the economy.”

It is nearly impossible to resolutely predict the broad effects of a recession. However, we have already felt impacts from the changing economy, according to Ms. Tigges. “A financial decline will be felt differently across varied metropolitan areas and industries,” she said. “While our speculation of a recession fluctuates, we turn towards our ability to evolve. Our resiliency to continually adapt to contemporary society and market trends will remain a guiding factor as we navigate new challenges we have yet to meet. Our adversity defines our business. As we have learned in the past several years, we must continue to anticipate the unpredictable.”

“We predict the executive search industry will be less impacted in comparison to other staffing sectors, with the effects being short-term with a quick rebound,” Ms. Tigges said. “Balancing the constant changes will be essential. Refining the executive search process will result in candidates who can easily integrate and support the prospective organizations’ present and future plans. As a result, the meticulous process will consider not just the individual’s skills, but how they adapt to organizational shifts or even crises in the marketplace. Prioritizing management and leadership skills, candidates will be expected to guide an organization through unpredictable changes while continuing to increase growth. Our role within the process will be to maintain consistent communication with our clients so we can intimately understand our client’s needs, ambitions, and expectations allowing us to match qualified candidates appropriately.”

Ms. Tigges also notes that there is a lot of potential in the continued consolidation via mergers and acquisitions across all industries, including staffing and search. “Strategic M&A deals will allows existing businesses to expand into new sectors or geographies,” she said. “As a people-first industry with heightened value on personal and professional relationships, widening one’s reach supports the expansion of these prosperous partnerships. In the fluctuating landscape of talent and business models, one must evolve by adapting to emerging industries and responding to the dynamic marketplace.”

 “Within the financial services industry, we anticipate that the upwards trajectory for hiring that we’ve witnessed over the past three years will slow down considerably,” said Michael Henry, managing partner with Massey Henry. “With financial institutions witnessing a more challenging environment with continued market volatility on the horizon, we expect organizations to be budget conscious in their hiring decisions. Likewise, candidates might be more cautious and hesitant around switching organizations given the concerns around a looming recession. We do continue to see a sustained interest in succession planning mandates at the C-suite level, as well as a focus on hiring executives for key functions such as risk, cybersecurity, and client experience.”

We are heading into a different economic era, according to Mr. Henry. “Recession typically indicates two consecutive quarters less negative economic growth,” he said. “By definition and application, the recession standard doesn’t address the significance of the new economic era that we are heading into. Digitization, higher interest rates, de-globalization, climate change, and the possibility of a pandemic resurgence create a backdrop for employers, governments, and customers that is much more significant than an economic downturn for a few quarters. The implication is that the industry will need to adapt accordingly and quickly to match the changes taking place in client organizations.”

“Nurturing relationships with clients and candidates will be even more important for executive search firms,” Mr. Henry said. “Firms with a public sector focus will find increased competition for roles, while firms that specialize in sectors or functions may need to further hone in on key areas of expertise. Regardless of these considerations, the demand for executives ⁠— especially amidst labour shortage challenges and the increasing gap in critical skills at the leadership levels ⁠— will remain strong.”

Hiring for 2023 will continue to be a challenge in my perspective, based on what we have seen in the market,” said Darcie Murray, senior vice president and head of the Americas of Mercuri Urval (MU). “It has been an exceedingly tight, and tough, candidate market, both for our clients and in our industry. From a client perspective, there continues to be a war for talent. We do see some early signs that clients may be slower to initiate recruitment mandates and/or fill open positions,  or take longer in the decision making process – similar to what we saw in early 2020 when no one really knew what was in front of us, but I think ultimately this will be a blip on the radar, for the first half of the year only.”

“2023 will be a market correction,” said Ms. Murray. “The last couple of years, we have seen an over-inflation of everything, from gas prices, to products, real estate and compensation levels for all types of positions, which was never going to be sustainable long-term. Every individual, and company, has been feeling the impact of this inflated marketplace, and so I believe what we are starting to see is an adjustment back to normalized levels. We are yet still resolving our actions and the effects from the global pandemic of 2020. Our reactions to this pandemic were swift and deep, and our recovery the same. Will this mean a slowdown or dip in the first half of 2023? Simply, yes.  Will this mean we go into a deep recession crisis? I don’t think so.”

Ms. Murray recently spoke to a chief investment advisor for an investment platform specific to the search and recruitment industry about M&A activities in the recruitment space. “He said currently he has 50 potential firms that are interested in some sort of merger or acquisition activity, so this indeed seems like a ripe time for it,” Ms. Murray said. “However, he indicated that there is zero appetite for the mid-market firms, and virtually none in retained, as banks will not loan the capital. I think for a firm like ours, who is wanting to grow and expand our business in the U.S., it could be an ideal time to consider who is in the market that might be interested in selling.”

“There are many founder/owners who are poised to retire, with no clear succession plans in place, so in my view, this could be a prime period to look at potential M&A opportunities during 2023,” Ms. Murray said. “As we’ve seen over the past many years, search firms are no longer simply search firms, they are diversifying their service offering portfolios to provide total solutions for their clients, this has driven much of the M&A activity, and I suppose will continue to do so.”

EY Americas’ convenient survey question percentages really don’t tell me anything of substance with weak explanations and broad percentages,” said Russ Riendeau, senior partner and chief behavioral scientist with New Frontier Search Company. “Talent acquisition is no less challenging than two years ago. The overrated Great Resignation was short-lived, with justified overly stressed out sectors of the workforce that, fortunately, had the means or support system at home to allow them to quit their job/contemplate their future and assess life goals. A year later, research suggests the majority of these workers ended up back in similar jobs after money ran low and motivation to do the deeper work in career change evaporated. High paid, effective talent is and never was part of this short blip on the screen.”

“Search professionals are not good at predicting things in the economy, as we are coin-operated and our energy is real-time issues and filling vacancies,” Mr. Riendeau said. “We see trends based on availability of top talent. Recession coming? Let the salaried economists tinker with their statistical formulas, while the rest of the business community simply adapts to the real changes in the marketplace. CEOs don’t brace for anything. They listen, watch, evaluate, and make the decision in real time.”

“Meanwhile travel is up, planes are being ordered, restaurants are full, cruise ships are sailing, so finding talent to work in these sectors are ever present  challenges,” said Mr. Riendeau. “Finding competent and driven talent in business development, creative roles around implementation of innovations to the market will be the frustrating parts of CEOs and their hiring managers to deal with. And with the lingering mental health challenges COVID installed in overall energy, goal-setting skills and family pressures of resetting to the new normal, that 10 percent of the workforce that typically is ever-looking for that new opportunity is staying put and not venturing away from home as before. This is really creating the talent shortage phenomenon, as much as Boomers retiring.”

2023 will be a transitional year for many insurers, including P&C and life and health, according to Craig Lapham, CEO of The Lapham Group. “There are multiple factors insurance industry companies will be juggling in the upcoming year: increased salary transparency, the need for reorganization, inflation, all coupled with the looming possibility of a recession,” he said. “Companies will need to permanently adopt new models introduced in the past three years to not only attract, but retain their talent, with flexible work arrangements essential to many seeking new roles, particularly within the digital sector. Risk mitigation focused on the cyber sector will continue to expand on a global basis as well.”

“If we are headed into a recession, it will likely be mild,” Mr. Lapham said. “Since 2020, the domestic insurance industry has demonstrated great resilience and grit, with no approach spared to adapt to the constantly changing market. Insurers on whole are well capitalized and diversified in terms of product offering, client base, and multi-channel distribution models. Still, a decline in the demand for insurance products is to be expected in the case of a recession.”

“Companies are facing uncertainty in the coming year, and we anticipate ebbs and flows in the search sector, like always,” said Mr. Lapham. “But now is still the time for companies to be primed for growth and profitability. Hiring in the insurance sector will be spurred on greatly through the everchanging technological and innovative sectors, with companies looking to digital solutions, data analytics, AI, machine learning, and the like to be integrated into everyday operations. These all provide opportunities for hiring.” 

As companies reassess/reevaluate in 2023 and prioritize profitability, there will be continued merging among traditional legacy insurers and newer insurtech companies to create new products and solutions in order to meet customer demand, according to Mr. Lapham. “Deals will be more targeted than transformative, with many companies seeking less risky options such as JV or strategic alliances and using these mergers/consolidations as an opportunity to restructure rather than scale,” he said. “As the market becomes larger and more saturated, there remains substantial opportunities to join forces and close the gap between the needs of customers and companies’ current capabilities. There also continues to be significant private equity activity within the insurance brokerage sector, with M&A continuing at a torrid pace.”

We expect to see a number of C-suite roles for our clients over the coming year as the focus on having the right leadership in place to navigate the current economic climate, the shift in worker preferences including the continued push toward hybrid/remote options, and the desire for more flexibility,” said  Ron Godier, founder and managing partner of Intalegence. “We expect our clients will be looking to add leaders who are forward thinking and exploring ways to meet the business objectives they are tasked with through technology and process improvements to provide the freedom the modern employee is demanding while helping to insure that culture, flexibility, and productivity can not only coexist but thrive.”

“Inflation is up, money costs more, and the Fed is saying at least one more bump of 25 basis points which makes people even more nervous,” said Mr. Godier. “At the same time, the cost of fuel is down, wages are up, inflation is slowing ,and the job market has cooled a bit but we still have 11 million open jobs as of the December job report after adding a net of 106,000 in the same month. So, do I think we are headed for recession? I think we are already there. I also believe it could deepen slightly in the last half of Q3 or early Q4 of this year if the Fed cuts too deep. If not, then I think we are headed for a period of stagflation through the first two quarters of 2024. At which point I believe things will steady out and inflation will continue to decrease over 2024 – 2025.”

Some sectors will feel a real crunch the rest of this year, according to Mr. Godier. “Hospitality, restaurant, and services search firms will be impacted especially if they are working on a contingent basis. We have also seen significant reductions in force in technology, however, many other companies are scooping up resources from these layoffs. I truly believe that if you are a retained firm, you will see some slow-down and perhaps some compression in fees, but the work will remain. I think this is particularly true in PE and VC as the right leaders are more critical than ever.” 

“I feel that consolidation will continue in the space as older founders and leaders opt out of the business,” Mr. Godier said.
“We are seeing across all sectors that Boomers and those Gen X leaders who are approaching retirement age are choosing to step out of the game if you will. Some of this may have been driven by the pandemic in terms of making different life choices given what we just experienced. I also think that some of the ways business is getting done now are a shift away from more familiar methods and this could be proving to be more than a seasoned leader wants to deal with at this stage of their lives.”

A growing number of applicants will expect to see diversity, equity, and inclusion statements and salary ranges in job descriptions, whether they live or work in states that mandate the disclosure of salary information on job descriptions, according to Matt Kamin, co-founder and managing partner of Envision Consulting. “In 2023, California, Rhode Island, and Washington join a number of cities, counties, and states in enacting salary transparency laws, thereby elevating the critical role of job postings in hiring strategies,” he said. “We anticipate that some clients may have to reconsider their salary ranges in order to be competitive in the hiring market. Right now, we are already noting that applicants are asking for higher salaries than what is posted. It’s also interesting to note that remote opportunities, which were a great benefit and selling point to applicants since the pandemic, are now fewer and far between in the non-profit sector.”

“Non-profit organizations are certainly bracing themselves for a recession in 2023, given all the speculation about a recession throughout 2022,” Mr. Kamin said. “A recession would affect the non-profit sector in much the same ways as the private sector: the workforce shrinks as a result of company downsizing, unemployment rises, job opportunities become more scarce, and employees and job candidates have less bargaining power. However, in a recession, non-profits that are the social safety nets in our society would see skyrocketing demand for supportive services and programs–with fewer staff to carry out that work. Fundraising positions are already in great demand, especially as non-profits prepare for a recession, but recruiting for those positions will be a challenge if salary ranges remain stagnant in the face of increased fundraising budgets and decreased donor ability to give.”
“Jobs that are prioritized for searches will reflect their organizations’ need to build reserves, streamline, and gain cost-efficiencies,” said Mr. Kamin. “Typically these are development director and other high-level fundraising jobs. Not only will salary transparency have a greater impact on how searches are conducted and what the hiring strategies are, but also it will likely cause wage compression across different industries. As a result, organizations can expect to incur costs resulting from turnover and job hopping among workers finding more attractive pay ranges elsewhere.”

“While we are not expecting the same robust hiring we saw between Q4 2020 and Q2 of 2022, we expect 2023 to be strong, continuing the trend above 2019 levels,” said Ken Schmitt, founder and CEO of TurningPoint Executive Search. “As a firm focused on placing marketing, sales, operations, HR, and C-suite leaders, we are continuing to see heightened demand for high impact talent to help companies navigate the return to an employee-centric mindset by many organizations. The role of strategic HR talent, CSOs, CROs, and chief strategy/growth officers will continue to gain momentum, with world-class companies developing more integrated workflows that require strong operational leadership as well.”

“Despite the surge in interest rates and somewhat dampened consumer sentiment over the last couple of quarters, the mid-market CEOs and PE firms we talk to are still expecting to invest in people and capital in 2023,” said Mr. Schmitt. “Many are cautious, but most companies have extremely strong balance sheets, consumers are not strapped with outsized debt, unemployment continues to hover at record lows, the number of voluntary quits, while slightly lower than the peak of early 2022, also remains at elevated levels, and most companies had a profitable 2022. Taking all of this into account, if we do have a technical recession, I expect it will be quite shallow and short lived.”

While 2021 and most of 2022 were the year of hiring, Mr. Schmitt believes 2023 and 2024 will see a renewed focus on retention and employee engagement. “Whether it is the need for more companies to develop and improve their diverse hiring, the desire of Gen Zers and Millennials to feel more connected and appreciated to their employer, or the expectation among employees that their employer take a stand on today’s social issues, best-in-class companies will find a way to engage and empower their teams,” he said. “Those that fail to embrace this new employer/employee reality will find themselves struggling to attract strong talent.

“While the days of record M&A in 2021 may be behind us, I expect 2023 will still see a strong M&A market in the recruiting and search sector,” Mr. Schmitt said. “Many owners who delayed their retirement due to COVID, will now be 100 percent committed to exiting the industry. Additionally, many mid-sized and large firms have demonstrated the value in building a more diversified firm, offering multiple solutions across different business lines to provide a one stop shop offering to their clients.”

Related: Hiring Top Talent in Unprecedented Times

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media

Share This Article


Notify of
Inline Feedbacks
View all comments