Eric Hanselman

Great to have you on, especially when you think about a topic like this that is not only top of mind, has such a tremendous presence, I think, in a lot of aspects of life in the current times, but the results of the latest macroeconomic outlook study are just out. And the responses are showing a lot of uncertainty. What do you think is driving this?

Malav Parekh

Yes. That's an excellent question and there's a lot of factors, in fact. But to just cap it off, we're just towards the end of a major event. And as the cliche says, we are in difficult turbulent times. So when the pandemic first broke out, most experts projected this kind of uncertainty and that kind of was the worst-case or best-case scenarios were created based on how long the pandemic would last, and it's still going on. So that's one factor, the pandemic itself.

There is no certainty that a new strain will not come up. And that kind of causes a lot of uncertainty, not only just based on business decisions, businesses are spending less, for instance, but also on government policymaking. And then you couple that with the fact that there were some policy decisions that were taken, and in public sentiment, something that we've been calling for -- calling as revenge spending. But it's been going on for more than a year now. So it's been a long-term event. So there are so many factors.

And then the supply chain disruption being a big one. No one expected it to last this long. Everyone anticipated that there was a little bit of supply chain disruption for a few months, and we are sort of in the second year of that. So a lot of factors. Labor shortage is another big factor that has led us here.

Eric Hanselman

Yes. There are just so many unknowns in this process. There are just so many things in play. And as you pointed out, the original estimates were -- well, we've now exceeded most of the original estimates with no clear resolution in place. So that seems to be the very definition of uncertainty.

Malav Parekh

Yes. The top line inflation estimate for 2021 was nearly 3%, and as you know that it was -- it ended up at 7%. So a lot of people did say that inflation will go up -- there will be inflation, sorry, but no one expected it to be so high and it continues to 7.5%.

Eric Hanselman

You mentioned an interesting term that Mike Nocerino was, on a couple of episodes ago, talking about consumer attitudes and the idea of revenge spending. And I'm just fascinated by the term, but -- the idea that, in fact, there may be accelerated spending just simply because there has been a holdback in spending for so long.

Malav Parekh

Yes. And that's seen not just in consumer as in buyers of goods, but even businesses. A heightened amount of M&A and expansions, but still because of the quantitative easing and most businesses cutting down expenses in 2020, there is now surplus liquidity. And when the cash is in surplus, people spend. Also because they know that tightening is around the corner, interest rates are going to go up and this is the time to spend.

Eric Hanselman

That's another interesting point that the anticipation of potentially greater restrictions, higher costs, increase in cost of goods, it is, in fact, going to accelerate that spending in the near term. So before we get too far along, can you give our audience some details on the study itself?

Malav Parekh

451 Research every quarter conducts surveys of business leaders across North America and some parts of Europe. But our focus of the research is primarily United States. And one reason is that ever since we started doing this particular study, COVID was already there and that kind of -- and its impact on U.S. and then subsequent policies and everything became the focus. The most recent survey we conducted from December 18 and January 4.

And while we were conducting the survey, we were mindful of the fact that the U.S. Fed has already made a U-turn on their policy on the inflation-is-transitory approach. And that kind of made us decide -- frame our questions for the survey accordingly.

We wanted to know what businesses think about this decision, not just that do you agree or disagree, but more of what is their outlook or sentiment for 2022, given under the circumstances that the tightening is approaching, interest rates are going up and an overall hawkish approach by the Fed compared to earlier when they were planning to do all of this, but in 2024. So this kind of change in approach and we wanted to study how the businesses are taking this.

Eric Hanselman

And get those impacts and really understand what they were thinking about it. Especially when you get as significant a change in Fed policy, that's going to get people's attention.

Malav Parekh

Well, yes. And also, it sends a message. So if you see the stock markets, I wouldn't say they are completely impacted by the message. But a part of the policymaking is also the signal you're sending to everyone. And we moved from they are taking a risk to, hey, they were not sure about it, right?

That change in the message is also something to think about because based on our research -- our report, businesses despite knowing and being aware that the rates are going to go up, most businesses are worried that the challenge is -- in fact, 86% of businesses believe that prices of their products in 2022 are either going to go up or continue to remain at the current level.

Eric Hanselman

Yes. If you've gotten 80%, a strong majority. Well, but it's an interesting thing. Brenon Daly was on also a few episodes ago and was talking about the impacts on merger and acquisition activities and the idea that tightening money policy also starts to -- the expectation is there may be impact on the stock market, which is a lot of the fuel for M&A activity. And -- but that, fundamentally, concerns about shifts in inflation are driving that as well.

Malav Parekh

The result of the survey was a big surprise because we were not expecting expansion-related activities this early. But given the fact that there is so much free cash available to a large number of businesses and that they've seen that Omicron is not as disruptive as its predecessors, on second thoughts, it does not seem too surprising. So what you said and what Brenon said makes sense on hindsight.

Eric Hanselman

Well, it's one of those things that all of this one step forward, two steps back, is Omicron going to be that serious? What are the impacts? And it just seems that it's that sort of whip sign of perspectives and information that create additional uncertainty.

Malav Parekh

And also about the pandemic itself, right? It's been sort of slowing down for a couple of quarters, right? And then Omicron, when it became big, there were some sort of cautious moments about -- for another slowdown. But that really hasn't happened. There's been a little bit of caution in the air, but I don't think the current challenges -- or the current response in the market is a result of the virus itself. It seems more -- and businesses, in our survey, they have cut down -- or sort of downgraded the pandemic from its top 3 major concerns. It's no longer there. So...

Eric Hanselman

Interesting. Well, actually, as we dig into, we talked a little bit about inflation, but you talk a little bit more in some more detail about the inflation and what other concerns they're expressing.

Malav Parekh

The biggest concern remains the employment situation, the labor shortage because, if you see, that is also feeding the inflation. And that's also feeding the supply chain disruption. So supply chain disruption is another major challenge that everyone is facing.

But if you keep looking at it and if you keep finding out what's behind one and the other, you all see that they are all interrelated. It's like a cycle, right, where one problem is feeding the other, which is feeding the third problem and then the third problem is feeding. So if you say energy prices is also feeding inflation, which is also feeding supply chain disruption, which is -- and when the labor cost is going up, the wages need to be higher, right?

And when wages need to be higher, employees -- prospective employees are those -- are going to seek higher wages, and then there's going to be bigger challenges in hiring. And then there is going to be also a lot of like what we are talking -- seeing as mass resignation where even though you are happy at your job, you want to move to a higher-paying job. So these are several challenges that businesses are facing, but they are all kind of interrelated.

Eric Hanselman

Well, and those are gears that mesh very tightly. So it's -- as you're saying, the lack of labor leads to higher cost, which leads to the Great Resignation, which increases inflation as salaries go up. Yes, it's a tightly integrated cycle. But I guess, the Fed is looking to potentially break at some point, but we'll have to see what they've got in their arsenal.

Malav Parekh

Yes. And the thing is that they will have to also worry about it's going to be a double-edged sword. So I'll just give you an interesting fact from my research. So till now, interest rates was never a problem in the U.S., right, always close to 0. And for most of 2021, Fed kept saying that it's not going to be up for the next couple of years, not before 2024, right, before the change -- or the retiring of inflation-is-transitory term.

So now suddenly, people are worried about -- or businesses are worried about high interest rates. And again, the high interest rates are good because they'll bring down inflation or they are -- that's what they have worked traditionally or normally. But nothing is normal now. So that's one way to look at it. And the other fear is that if you do too much, not just in terms of interest rate hike, but also reducing the balance sheet through quantitative tightening, it could potentially lead to recession.

And to add to all of that, we are now also looking at a potential geopolitical challenge of what's happening in Ukraine and Russia and the stake the U.S. holds in it and how it directly impacts oil prices. So it's not going to be easy. Under ideal case scenario, our interest rate hike should address some of the problems, but we are nowhere close to that ideal case scenario.

Eric Hanselman

Well, I think you really summed it up in that nothing is normal now. So in this environment, how should businesses be putting the results of this study to work?

Malav Parekh

That's really tough to answer. And one big reason is that...

Eric Hanselman

We're just here to ask the hard questions.

Malav Parekh

Yes.

Eric Hanselman

I've got the easy job.

Malav Parekh

Yes. I've thought about that. I've given it a little bit of thought based on what some of the businesses and some of the trends that we are seeing. I think the only answer -- and what some of the businesses are doing. So the way they are dealing with inflation is by passing it to the customer. And the customer has to now decide if they are willing to pay that amount.

And just to give you an idea. The number of businesses, which are saying that inflation -- or the prices of their own products are going up, they have jumped almost 2.5x from a year ago. In just a year, right? So -- and from businesses which were saying that prices of our products were falling, they have dropped from 16% to just 4%, maybe -- like almost near 0, right? So businesses are doing a little bit of that. They're raising the prices of their products and they have to keep raising until the inflation is under control. They don't have much of a choice.

Eric Hanselman

As you said, and this is with this cycle, the fact that wages are going up, cost of goods are going up, yes, very little choice in the matter.

Malav Parekh

Yes. And with the wages going up, the businesses are looking at lower margins, right, because it's not just that they are -- they are not being forced to hike product prices at the rate of inflation, they have to see other things in mind. And in some way, anything, which will help them with cost cuts, say, digital option, for instance, or digital transformation is going to be something that will -- the whole pricing part of that is going to be very, very enticing for them because they would want to cut corners wherever they can. And that's not coming from job cuts, which is traditionally the lowest hanging fruit.

Eric Hanselman

So automation, digitization, all pieces that could potentially help in terms of managing costs. Well -- and that is a great lead-in for our next episode, Sheryl Kingstone is going to be on talking about the quantification of digital experience and has some really interesting data that is the perfect segue. So thank you for introducing that.

Malav Parekh

My pleasure.

Eric Hanselman

And thank you for all of this wonderful data. These really are -- it's great to get some quantitative perspectives on a lot of the things that we sort of felt in the market in general. So especially in data and the macroeconomic outlook, a lot of these things really start to allow us to put a very specific finger on the pulse of what's going on in the market. So I will encourage our audience to take a look at the study. But we are at time, and that is it for this episode of Next in Tech. Malav, thank you for joining me. This is great data.

Malav Parekh

Thanks, Eric. I'm really, really happy to be here and will be happy to come again.

Eric Hanselman

Well, as we're moving into the next round of data, by all means. As you said, we're in this transition and I guess we're in for the ride. So we'll see where we go, but great to have some data to give us some signposts on that journey.

And thank you to our audience for staying with us. I hope you'll join us for our next episode. As Malav has introduced this, it's going to be Sheryl Kingstone, who's going to be back on the podcast talking about digitizing customer experience and the quantification of what that actually looks like. So again, it's more data useful there. But hope you'll join us then because there is always something Next in Tech.