From Wall Street to Main Street, whispers about a coming economic slump have risen to nearly a roar as the Federal Reserve ramps up its battle against the highest inflation in four decades. It’s time to get ready.
Recessions have psychological and confidence aspects. For example, if companies expect economic activity to slow, they may reduce employment levels and save money rather than invest. Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession.
Across the nation, the leading topic of economic conversation – high inflation – is swiftly morphing into growing certainty of a coming recession. And business leaders have rapidly moved from muted fears to openly chattering about an economic slump during investor discussions and inside their companies.
On June 8th, 2022, Nobel laureate economist Robert Shiller, in a Bloomberg interview, stated he sees a “good chance” of a US recession that’s at least in part the result of a “self-fulfilling prophecy” as investors, companies, and consumers grow increasingly worried about a downturn.
Shiller puts the chances of a recession sometime over the next couple of years at a “much higher than normal” 50%.
Shiller also said that Americans are more likely to succumb to a self-fulfilling prophecy of a downturn because the country is collectively suffering “post-traumatic stress disorder” from the pandemic. More than 1 million Americans have lost their lives to Covid-19.
But recessions are each painful in their own way.
And the next one — which economists see as increasingly possible by the end of next year — will probably bear that out. A US downturn may well be modest, but it is likely to be long, preparation is key.
“A faltering economy is all but inevitable,” said Lindsey Piegza, chief economist for Stifel Nicolaus & Co. “The question has moved beyond if we are going to see a recession to what’s the depth and duration of a downturn.”
JPMorgan’s Michael Feroli agreed a recession might be lengthy if it occurred. “We don’t think it will be a severe one but it could be a long one,” he said.
Choices have consequences, and it’s tempting for a fatalist to conclude that we can’t escape the pain associated with the mistakes of the past. “Trying to postpone the inevitable will only make things worse in the long run, etc etc.”
It would undoubtedly be a mistake to ignore the limitations we now face. But it would also be a mistake to conclude that nothing constructive can be done today to position your company to come out ahead, regardless of whether a recession comes on fast, slow, or not at all.
In their 2010 HBR article “Roaring Out of Recession,” Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen found that during the recessions of 1980, 1990, and 2000, 17% of the 4,700 public companies they studied fared particularly badly:
- They went bankrupt,
- They went private, or
- They were acquired.
But just as striking, 9% of the companies didn’t simply recover in the three years after a recession — they flourished, outperforming competitors by at least 10% in sales and profits growth.
A more recent analysis by Bain using data from the Great Recession reinforced that finding. The top 10% of companies in Bain’s analysis saw their earnings climb steadily throughout the period and continue to rise afterward.
A third study, by McKinsey, found similar results.
Companies successfully resisting and reacting to a negative shock are, in fact, those capable of adjusting their strategy (and organizational set-up) to a fast-evolving context to cushion the effect in the short-run and enjoy a competitive advantage as soon as the economy recovers.
Harvard Business School Professor, Rebecca Henderson, likes to remind her students, “Rule one is: Don’t crash the company.”
That means, first and foremost, don’t run out of money. Because a recession usually brings lower sales and less cash to fund operations, surviving a downturn requires deft financial management.
“Recessions offer opportunities for change,” notes Sadun.
Some layoffs are inevitable in a downturn; during the Great Recession, 2.1 million Americans were laid off in 2009 alone. However, the companies that emerged from the crisis in the strongest shape relied less on layoffs to cut costs and leaned more on operational improvements, Ranjay Gulati and his colleagues found in their study of public companies.
Planning is imperative to surviving and thriving during a recession. Among the companies that stagnated in the aftermath of the Great Recession, few had made contingency plans, according to the Bain report.
Over the next week we’ll be digging into strategies you can implement to prepare your company for the coming months, and possibly years, of an economic pullback. The end goal is to give you an outline for you to create an action plan.
“When the downturn hit, they switched to survival mode, making deep cuts and reacting defensively.”
This is the opposite of what we want.
Listening to those who have seen, studied, and advised on how a small business can position itself to survive and thrive during an economic downturn is advisable. But small contractors often don’t. Our instinct is to lock down, pull back, and regress into a defensive stance in order to protect what we have.
But these instincts don’t protect what we have; they cut off opportunities and cloud our sight. Those who lock down during stressful situations tend to experience more isolation, greater conflict and stress, poorer health, and reduced well-being, making stressful situations feel worse than they actually are.
We don’t want you, your business or your team to go through that.