The daily reports of an impending recession are nauseating. It is true that two-thirds of economists believe that a recession is likely to occur in 2023. But that correction – or soft landing – will represent conditions not unlike those we have seen in the U.S. in our lifetime.
Historically, there has never been a U.S. recession during full employment, and many pontificators are struggling to reconcile the recession in the face of such a booming labor market. Today there are twice as many jobs as there are people looking for them. Similarly, while real estate deals are declining, annual prices are still up 5%, and there is strong demand for housing in almost every major U.S. market. It doesn’t look like a bubble, even with higher interest rates.
In retrospect, it is clear that the Federal Reserve waited too long to raise rates because it thought inflation was temporary. According to The Wall Street Journal, Federal Reserve officials have since indicated that they “accept the risks of a recession because they are determined to prevent what they believe is the worst: a change in consumer psychology that could keep inflation high.” On July 13, the Labor Department announced that the Consumer Price Index was up 9.1 percent from a year earlier.
The motivation of the Fed today is to shock the system so that the spiral of wages and inflation does not continue indefinitely. That is, if we are forced to put up with inflation, our economy could slide even further into desperate conditions.
Our real fear should be the stagflation of the 1970s, when high inflation dragged the economy down for an extended period, reversing the labor market and causing massive unemployment and wage deflation. Underlying this recession was the high cost of energy, which accounts for about a third of the current CPI.
According to Bloomberg, 35% of Americans already think we are in a recession and another 36% think we will be in one by the end of the year. The economy will officially be considered in recession when the National Bureau of Economic Research (NBER) finds a significant decline in economic activity lasting more than two quarters. We are facing a decline in early 2022, and second quarter data will be available in September.
“Animal spirits” are picking up in the stock market, where cautious investors are looking for liquidity. Major retailers such as Target and Walmart have announced reductions in their inventory.
Looking ahead, here are some things businesses can do to prepare for the days ahead:
Develop your business relationships.
Strong operators continue to stay closer to customers as they manage price increases, longer cycle times and other pain points. Customers who have the same issues appreciate suppliers who are transparent, even when it’s inconvenient. Loyalty can be more important than profit.
It’s important that you’re not a one-trick pony. Look for ways to diversify revenue either through customer diversification, sector diversification, vertical integration, or finding new services to bypass your core product. Sell more products to existing customers at zero acquisition costs.
Lots of money.
While cash values are declining in a time of high inflation, cash still reigns supreme in times of uncertainty. The ability to move quickly to secure a product or asset acquisition will be critical.
Own hard assets.
Until inflation begins to deflate, hard assets such as real estate and gold will be value conductors.
Reduce your business expenses wherever possible and maintain a healthy cash reserve. This is simply not the time to allow selling, general and administrative expenses to increase. Make sure your customers’ debt obligations to your business are met during this time.
Debt can help your business grow in times of economic prosperity, but during a recession you may not be able to service your debt (especially if interest rates are high).
Companies are notorious for cutting back on marketing during recessions. The smart ones invest while competitors are winding down (assuming there isn’t a sharp decline in industry demand). Growing companies can gain share during recessions, but the key is to have a clear sense of purpose and provide laser-accurate marketing activation to the appropriate audience.
Look at it from a long-term perspective.
During a pandemic, we became firefighters. But the best companies are looking around the bend at a disruption that could change their industry forever.