Corporate Executives Assess U.S. Economy as Clouds Form

Retailers such as

Walmart Inc.

and

Target Corp.

, whose profits soared in the pandemic, have reported that higher costs have begun to eat into earnings and that some shoppers are beginning to curtail spending. In recent weeks, stores that struggled with too little inventory last year because of supply bottlenecks have reported that they are carrying more apparel, appliances and furniture than consumers want.

“That hurricane is right out there down the road coming our way,”

JPMorgan Chase

& Co. Chief Executive Officer

Jamie Dimon

said at a conference this past week. “We just don’t know if it’s a minor one or superstorm Sandy. You have to brace yourself.”

Brian Moynihan,

CEO of Charlotte, N.C.-based

Bank of America Corp.

, had a more tempered outlook, saying at the conference that his customers still aren’t talking about recession fears. “We’re in North Carolina,” he said. “You’ve got hurricanes that come every year.”

The American economy remains largely healthy. The U.S. added 390,000 jobs in May, and demand for workers remains historically strong, particularly in service industries such as restaurants and airlines. Job openings are close to record highs. Planes are full, hotels are booked and high-end retailers including

Lululemon Athletica Inc.

are raising prices in the midst of brisk sales.

“There’s a lot of discussion and talk about a recession coming, but if you look at our building or been on an airplane recently you’d never notice it,”

Bob Nelson,

a senior vice president at

Costco Wholesale Corp.

, told analysts recently. The retailer said sales rose 10.8% during the most recent quarter.

Still, business leaders say they are increasingly preparing for a new normal in which companies’ fortunes start to splinter as inflation persists and consumer budgets tighten.

Wage growth in May slowed from last year’s average, the Labor Department said Friday. Existing-home sales were down 5.9% in April from the previous year, according to the National Association of Realtors. Consumers boosted their spending rapidly in April, but in the midst of indications that many were tapping their savings to do so.

Many large companies, including retailers and consumer-products makers, have been able to raise prices to offset rising costs for staffing and shipping. Recently, companies such as Walmart and

Procter & Gamble Co.

have signaled that those conditions are changing and that they are bracing for a pullback in spending. They are bringing back more bargains and cheaper store brands in the midst of signs that inflation is taking a toll on lower- and middle-income shoppers.

Mr. Dimon said that U.S. consumers still have some six to nine months of spending power left in their bank accounts as the government’s pandemic stimulus continues to pad consumers’ wallets. At the same time, Mr. Dimon said the economy faces significant uncertainty as that money dries up and during geopolitical tensions.

Russia’s invasion of Ukraine has badly disrupted global energy and commodity markets, sending inflation to high levels across much of the world and risking sharp slowdowns in the U.K. and elsewhere in Europe.

The Federal Reserve is raising interest rates to cool demand and lower inflation, which in the U.S. is running at around a four-decade high. Officials are set to follow last month’s half-percentage-point rate increase, the first since 2000, with additional half-point increases at their meeting this month, on June 14-15, and again in late July.

The Fed is hoping to achieve a so-called soft landing in which demand cools by enough to bring down inflation but not so much that the U.S. economy tumbles into a downturn, marked by declining economic output and rising joblessness.

Fed officials say a soft landing is possible—for example, if the slowing economy causes companies to eliminate excess job vacancies without significant job cuts. But plenty of observers expect or worry that the landing will be painful, and Fed Chairman

Jerome Powell

has conceded that is a possibility.

“It is going to be a challenging task, and it’s been made more challenging in the last couple of months because of global events,” Mr. Powell said in an interview last month.

A major reason for the concern is that the Fed is moving rates up at the most accelerated pace in decades. It could compress the entire series of rate increases from 2015 to 2018 into a matter of months this year.

Uncertainty over how high rates will rise represent another source of worry.

“This is among—if not the most—complex, dynamic environments I’ve ever seen in my career,”

Goldman Sachs Group Inc.

President

John Waldron

said at the conference. “The confluence of the number of shocks to the system to me is unprecedented.”

On Wall Street, investors’ attempts to figure out whether the economy will cool down just the right amount or slip into a full-blown recession has led to dramatic swings in markets.

Just two weeks ago, the S&P 500 nearly entered a bear market—a fall of at least 20% from its January peak—after a brutal few sessions kicked off by disappointing earnings from big-box retailers that heightened investors’ fears of a looming recession. The next week, all three major indexes jumped at least 6% for the first time since 2020—only to give back a portion of those gains this past week.

Overall, the S&P 500 has fallen about 14% this year, while the Nasdaq Composite Index has lost more than 20%. Stocks fell again Friday even after the relatively strong jobs report, reflecting continued fear that the Fed might have to raise interest rates aggressively to tame inflation. Particularly hard hit were shares of tech companies, which have led declines this year and are seen as especially vulnerable to higher rates.

Falling stock prices don’t necessarily mean that the market is signaling a recession. Analysts’ expectations for corporate earnings over the next 12 months have actually increased since the end of last year, according to FactSet. Stock prices have nonetheless dropped, analysts said, in large part because expectations for higher short-term interest rates have driven up yields on U.S. government bonds.

That climb has offered investors a risk-free alternative to owning stocks and dragged down valuations, which had surged during the pandemic, by reducing the value of future earnings.

“I don’t want to say 100% but…equity-market returns this year have been a function of higher interest rates and a lower valuation as compared with a stock market that perhaps is more driven by earnings,” said David Kostin, chief U.S. equity strategist at Goldman Sachs.

Matt Peron,

director of research at Janus Henderson Investors, said his team closely parsed the Walmart and Target earnings that spooked markets last month. Its conclusion was that the earnings didn’t send “an overall recession signal,” reflecting instead a shift in consumer spending patterns.

His team’s strategy this year has been to buy shares of companies with more free cash flow and lower valuations, shying away from riskier bets. Like many investors, the team is hopeful that inflation will moderate, reducing the chances that the Fed will have to raise rates so quickly that it would cause an imminent recession.

Still, Mr. Peron said, investors are caught now in an awkward spot, wishing at once that the economy will slow enough to bring down inflation but not so much that it would seriously damage corporate earnings. Such a conundrum is normal, he said, around this point in an economic expansion, “but this cycle is particularly challenging” given the level of inflation.

Tech companies that have been racing to add jobs for years and battling each other for talent have suddenly slammed on the brakes in recent weeks, citing a range of factors.

Facebook’s parent said last month it was halting or slowing hiring for more mid- to senior-level positions, and Twitter Inc. froze all hiring, in the midst of disruptions in the digital advertising market. Facebook alone has added nearly 55,000 employees over the previous five years, more than quadrupling its workforce.

Uber and its rival

Lyft Inc.

are downshifting their hiring. Streaming company

Netflix Inc.

said last month it was cutting about 150 employees in the midst of slowing revenue growth and a shrinking subscriber base.

Mr. Musk’s announcement about cutting a tenth of Tesla’s salaried jobs comes as he has warned about the looming prospect of a recession—and after a hiring spree at the electric-vehicle maker. Last month he suggested on Twitter that the economy was headed toward recession that could last 12 to 18 months based on experience.

Even some tech companies that continue to thrive are more cautious. Business-software company

Salesforce Inc.

this past week reported a better-than-expected 24% increase in quarterly revenue, sending its stock price up. But executives emphasized discipline in the company’s operations. “We’re going to continue to hire, we are hiring, but we’re doing it at a much more measured pace, and we’re focusing the majority of our new hires on roles that will support customer success and the execution of our top priorities,” Chief Financial Officer

Amy Weaver

told analysts.

The retail sector, where employment had surpassed its prepandemic level for the first time in January, has shed more than 70,000 jobs since February.

Many economists and analysts have anticipated a slowdown for highflying technology companies and in goods-producing sectors of the economy, which boomed during the pandemic. Supply chains were disrupted and inflation soared in large part because the composition of consumer spending, buoyed by government stimulus, shifted into goods and away from services. A rotation back to prepandemic consumption patterns has long been viewed by economists and Fed officials as a precondition for any slowdown in inflation.

Even as some labor pressures ease, many executives said they are still struggling to find enough workers to fill hourly roles in restaurants, hotels and related fields where veteran staffers changed industries during the pandemic and never returned.

“It is challenging,” said

Anthony Capuano,

CEO of the hotel company

Marriott International Inc.

“There are folks that have permanently left the travel and tourism sector because their confidence in the long-term employment viability was shaken by the events of the last two years.”

Some tech companies say they are sticking with existing hiring plans.

Intel Corp.

expects to hire thousands of employees in the coming years, said Christy Pambianchi, the chip maker’s chief people officer, as the company opens new manufacturing facilities to help meet surging demand for semiconductors.

“It is a very tight labor market for a lot of the talent we’re trying to find,” she said. “While there might be some noise in the labor-market dynamics, I don’t think it’ll change the backdrop against which we’ve been trying to hire or retain our folks.”

Still, the U.S. labor market had been “very, very, very tight,” Ms. Pambianchi said, and over time it may “just get a little more in balance.”

The uncertainty over what is next for the economy has led some executives to watch spending more closely. At

Hologic Inc.,

a maker of mammography systems and other medical technology, CEO

Stephen P. MacMillan

said he is scrutinizing additional hiring and taking a cautious approach to new investments in case the economy sours. “We’re managing our company as if there could be a downturn,” he said.

At

RH,

the furniture retailer formerly known as Restoration Hardware, CEO

Gary Friedman

called conditions possibly the most uncertain he had seen in 10 or 15 years.

“How do you prepare yourself for almost anything and everything that could happen in a market like this?” Mr. Friedman said on a recent call with investors. “I think we’ve got a long ways to go in raising interest rates to fight inflation. And I think you just have to be prepared for anything right now.”

Write to Chip Cutter at chip.cutter@wsj.com, Nick Timiraos at nick.timiraos@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com