Over the next two to three years, there are going to be dramatic changes to how businesses run their day-to-day operations.

That’s according to Jeff Drummonds, outgoing CEO of LBMC, PC. Between inflation, threats of a recession, struggles to retain workforce and access to capital, Nashville businesses are either going to sink or adapt so they can swim. And a good chunk of that adaptation will likely occur in the artificial intelligence space, according to Drummonds. 

“We are still seeing more talk than do,” he said. “That said, it’s around the edges. We are using AI without even realizing it.”

Global, U.S., State of Tennessee – Outlook

Global economic forecasts show modest growth compared to 2023 with slowing inflation and stabilized supply chains. The U.S. is anticipating a soft landing from recessionary pressures by the second half of 2024, helping businesses to focus on growth again. The State of Tennessee reports cautious optimism with modest growth anticipated in the coming year, despite a 2023 downturn in the manufacturing sector.


Economic Challenges

Although the U.S. is forecasting a soft landing in 2024, other economies such as China, Japan, the UK and parts of Europe are still concerned about recession. Global growth is trending lower compared to 2023, with geopolitical risks and war contributing to the pessimism. There will be continued challenges in developing countries where leaders are faced with trade-offs between climate change sustainability measures and improving economic conditions for their people. Although labor markets are loosening, lending conditions and politics continue to create economic volatility.

Growth Trends

Aggressive monetary and fiscal tightening may be over, with inflation cooling across the G10 countries and emerging markets. Global manufacturing activity is expected to recover somewhat in 2024 and steer toward growth as inventory cycles normalize and consumer spending remains strong. A resolving energy crisis in Europe should also support real income growth.

U.S. Economy

Economic Challenges

With no expectation for interest rate cuts until mid-2024, financing will remain tight, and companies will avoid nonessential spending. Tightness in the labor market will remain a challenge to growth.8 Overall consumer spending will contract in the first half of 2024 as consumer debt rises and student loan debt payments resume. If inflation and interest rates decrease later in the year, consumer spending and the housing market may rebound.

Growth Trends

Government contracts represent a bright spot in the U.S. economy with support for infrastructure projects and other non-defense spending. Year over-year GDP growth is forecasted below 1% through most of the coming year, and business investments are focused on essentials for growth. Valuations may go higher as investors remain bullish, but U.S. liquidity is at risk due to a national debt downgrade that will eventually lead to less government spending.

State of Tennessee

Economic Challenges

The top three business concerns among Tennessee leaders over the next year are adverse economic conditions, risk management and the ability to obtain financing, according to the Boyd Center for Business and Economic Research 2023 Survey. A close fourth concern is existing U.S. competition.

These concerns closely mirror our survey results where 70% of business executives are concerned about the U.S. economy and 48% are concerned about access to capital, loans or lines of credit.

Leaders say that having an ample supply of local talent who are properly trained is the biggest hurdle to growth. Just over 40% of respondents in the Boyd Center survey anticipate moderate growth with about 30% expecting similar revenue/no growth.

Growth Trends

Manufacturing and healthcare were among the top industries contributing the most to state GDP growth in 2023; those trends are expected to continue in 2024. Healthcare is Tennessee’s largest employer, with Retail and Manufacturing listed as second and third. Manufacturing was the biggest loser in labor growth among the top industries in 2023 with a higher percentage of layoffs and closures. However, population and building permits are on the rise, which indicates that the economy could see improvements long-term in employment, tax base and GDP.

NBJ's Economic Outlook 2024

Drummonds spoke with Nashville Business Journal Publisher Lori Becker at the NBJ’s Economic Outlook 2024 event Nov. 9 on what businesses are predicting for the upcoming year and what they should keep an eye on.

The talk centered around the results of a study conducted by American City Business Journal, in partnership with LBMC. The study ran from Sept. 7-20 and included 185 participants. The survey link was sent to those who opted-in to receive email communications from the Nashville Business Journal; additional recruitment took place on the Nashville Business Journal website.

In the study, 70% of the participants expect national economic conditions to continue to deteriorate over the next six months and half expect access to capital to decline.

“If you’re running out of capital, God bless you,” Drummonds said. “If you’ve got losers or things that are just not really going anywhere, it’s time to be done.”

The main indicators an economy is in trouble are issues with access to money, transportation and banking, according to Drummonds. He’s already begun to see a key indicator of economic issues in his own business, as his firm is having to call clients one to two times more to collect funds than in the past.

LBMC is the largest technology services firm in Nashville, according to Business Journal research, and the second-largest accounting firm. The firm has approximately 10,000 clients across a range of industries including health care, manufacturing, technology and private equity.

Drummonds said Nashville is doing well in comparison to the rest of the country, and three quarters of business leaders surveyed expect to grow their companies in the coming year, according to the research.

“Companies are having record years because of inflation,” Drummonds said. “If you’re not doing well in Middle Tennessee, you need to take a hard look at yourself in the mirror because if you can’t do well in this business environment, you really need to rethink the thesis of your book.”

More than half of participants in the survey plan to or already have raised the prices of their goods and services due to inflation.

But Drummonds cautioned that inflation could reach a point where consumers can no longer afford products or services, which “doesn’t necessarily translate into profits.”

Workforce and technology

The three main areas businesses plan to increase their spending in 2024 is employee training, marketing and technology, according to the research.

Since the pandemic, Drummonds said businesses have learned a lot when it comes to the importance of employee retention.

“Some of those [years] were very much the school of hard knocks,” Drummonds said.

Nearly 70% of respondents plan to increase their workforce, according to the research. But maintaining the current workforce is going to be critical when it comes to that growth, according to Drummonds.

But in some cases, adding technology will be instrumental in reducing workforce workload. And yes, that includes AI.

“We just can’t continue to throw more arms and legs at things,” Drummonds said. “People are realizing there’s a better way.”

At the end of the day, Drummonds said there will be winners and there will be losers.

“Inflation, I don’t really see that slowing anytime soon,” he said.

Originally posted by NBJ on November 10, 2023.