Ingram's November 2022

Q&A ... W ith S tephen P enn KPMG’s Kansas City managing partner addresses a stew of challenges, from inflation and recession to the labor market and demographic change, as 2022 starts winding down. Thought Leader Insights: Economic Fundamentals

Q: Lots of talk about a recession coming or, as a technical matter, already here. Canyougiveus somethingof anoverall view of current economic conditions and howyour clients are responding to them? A: There is a consensus that we are in a recession, or if we’re not already in one, we’re on the cusp of one. There is also a consensus that we aren’t set up for a really deep recession, although the risk has moved to the downside. On the continuum, businesses increasingly think the risk of a deeper recession is growing. But I actually think there is less concern about the recession than inflation, though the two go hand in hand. There is more concern about getting inflation under control and trying to keep it from becoming “sticky.” There seems to be a belief, or maybe just an acceptance, that a mild recession may be the necessary cure. It feels like most business folks are increasingly accepting that’s what it will take. Q: Abig part driving inflation over the past year has involved the supply chain, and we’re seeing some metrics suggesting that the bottleneckmay be easing. Your take? A: Yes, we are seeing shipping and warehousing much cooler than a year ago. Q: When you look ahead to 2023, what fundamentals have your attention? A: We generally hear from businesses that they are focused on labor—or, actually, the lack of labor. The labor market is still tight, and that’s been an issue. While we are beginning to see some better economic numbers, the strong labor market persists. Businesses are also starting to think about liquidity, though there’s not a specific concern. Rather, there’s an awareness that when these cycles happen, sometimes they are exaggerated by liquidity issues. I think people are in a better spot now than last time (2007 09), but prudent companies are always getting cash when they can, not when they need it.

estate’s recovery, and how has that played out for KPMG in the post-COVID era, if we’re not jumping the gunwith that term? A: Commercial real estate ismoderating, but it’s still unsettled and it’s lumpy. It certainly has not returned to pre-pandemic levels and is somewhat random. Most companies are still figuring out what their commercial footprints are going to look like. For us, we are using space differently and using our space in more collaborative ways. Our office footprints are generally the same as before, but as leases renew, that space may shrink somewhat. But we are using office space differently; when our people are in the office, it’s more intentional. We’re increasingly utilizing a hybrid model; folks are generally either in the office or at our client sites for part of the week and remotely working the rest of the week. We recognize the importance of coming together to collaborate and learn, all while balancing flexibility. I suspect some version of hybrid is here to stay. Q: We’ve talkedwith business owners who feel that the economy’s excess cash, driver of inflation, has been wrung out, especially with manufacturing. We also hear that there’s too much cash still floating around. Your assessment? A: There is still excess cash out there. The issue is where the excess cash is. The excess that existed at lower-income levels, the lower wage earners, has largely worked through the system. Q: So what’s left? A: The excess that remains is mostly in the hands of higher-wage earners. We’re also seeing higher credit-card usage, higher balances, and similar trends, which may be more indicative of financial stress than higher consumer demand. The excess savings of lower-end wage earners are generally gone. Q: Is there a lesson in that for those who might one day propose further stimulus spending?

A: I thinkwe have a lot of lessons to learn around stimulus spending and government policies enacted to get the economy going, with a notion of getting the grease back in the economy to induce spending without a thoughtful recognition of the potential hazards. Q: Are you optimistic that the Fed has adopted the right strategy in terms of timing and scope of interest rate adjustments? To borrow from the Goldilocks model, has it left things too hot, too cold, or just right? A: The task is bigger than it is normally; it is unprecedented. Whether they started too late, are going too far, or need to do more is up for debate. What we do know is that the Fed’s actions are so different from normal because they’re dealing with a problem that is so different from normal. Q: What are the most frequent questions you’re getting from business owners about how they need to position themselves in the event of a full-on recession? Is there a sense of hunkering down, or is there a greater sense that we could be looking at a rare opportunity to build market share with the right strategic moves? A: I think there’s cautious optimism there. There’s still some interest in acquisitive activities. Certainly, the IPO and those markets are basically non-existent, but companies are still taking advantage of opportunities. They are being strategic in their thinking about how they are positioning themselves. Not all companies are hunkering down to ride out the storm; many are being strategic, albeit cautious. Q: Are individual investors’ concerns fundamentally different from those of business? That is, are they behaving more cautiously? A: People are just being more selective. They’re also cautiously optimistic, trying to take advantage of some strategic opportunities. It’s interesting; I have heard several folks in

Q: What’s your take on office real

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November 2022

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