I have always had a keen interest in following the economy. So many variables effect the direction of the economy; the patterns, cause and effect, and the ups and downs. Its thought provoking for me to take it all in and ponder what will happen. I read the Financial Times everyday (it's the British version of the Wall Street Journal). I like it because its loaded with facts about what's going on around the world as it pertains to the economy. It has a broader view than the Wall Street Journal.
I also have a strong interest in history. One of the most fascinating things about history is that it does indeed repeat itself. Humans tend to react in similar ways to similar problems, especially if they haven't studied their history!
When combining these interests, I observe whats going on with the economies around the world and why. Then I reflect on how similar economic events have played out in the past. This often helps me shape a picture of what may happen.
That being said, I'll make a bold prediction here, and explain my thinking behind it. In my previous blog post about inflation (read here), I detailed how it normally plays out. Inflation builds until the economy overheats. On the surface, it seems like the economy is booming. There is an excess amount of money in the system, so its being deployed. Businesses are stocking up, raising wages, making improvements or investing. All this money, chasing the same amount of goods, causes prices to go up. Hence, the crazy inflation we're seeing right now. In this scenario, eventually the economy overheats, resulting in a recession.
Since I wrote that blog post, the inflation numbers have been going up at an alarming rate. As I read the Financial Times, there are articles about inflation in specific countries, in the Eurozone and in America. The common thing I come across in each and every article recently is that inflation is the "Highest in 13 years" So if you do the math that was 2008.
Rewind to August 2008, the credit crunch was underway and the financial crisis started in earnest. Gas was over $4 a gallon at the pump. By the second quarter of 2009, we were in a recession. The economy overheated. It played out just as other recessions of the past.
So here we are 13 years later with an even worse set of variables. This time around, its a global problem. The list of reasons why this is happening is even longer... Supply chain issues, continued shutdowns due to COVID-19, hiring issues, massive government stimulus world wide.
I predict the United States will be in a recession in the second quarter of 2022. I may be off by a quarter, but I think I'll be close. Here is why:
Inflation is going to continue. Supply chain issues persist. The cost of transport continues to go up. Input costs and producer costs continue to rise as well. Wages are rising significantly again. All of this points to an economy overheating. Also, the Fed is going to be forced to raise rates soon, once they realize the current inflation is not transitory. Sadly, there are going to be too late. Russia, Brazil and other countries have already starting raising their interest rates to fight inflation. Add onto that a huge bunch of uncertainty now that terrorism will be a major problem again, as the fallout from losing the war in Afghanistan continues.
We have a severe and extraordinary sequence of events that will lead to this recession, so it stands to reason it will be particularly severe.
As a business owner, how to prepare?
Assume your revenue will decline by 25%. Then look at your expenses and determine where you can cut to make up the difference. For example, reducing the work week to four days vs five days will save you 20% on payroll expenses. So take a look at all your numbers and draft a plan. This way, when trouble hits, you'll have a clear idea of what to do immediately.
Take some time to examine what your clients or customers may do to adapt during a recession. There may be an opportunity there to take advantage of. Adapt your product or services accordingly.
What worked before may not work now. Determine what the landscape will look like. How does your business need to change? What product or service should be cut? What product or service could be introduced?
Keep a close eye on your competition. A recession may create an opening for you to triumph over the competition. There may be an opportunity to draw customers away from them. Offer solutions your competition doesn't have.
Stay close with your biggest existing clients. Take a closer look at what pain points they may experience during a recession and see if you can adapt and provide them with solutions.
Continue to advertise or advertise more. At first, you may consider cutting your marketing or social media management. This is not a wise move. Your competition may do the same, so if you continue to advertise and push out custom content, you'll have an edge. In addition, during the Great Depression, the businesses that continued to advertise did the best. Many of the solid brands of today established a firm foundation because they aggressively advertised at this time and ended up dominating the market.
If you haven't done so already, you should raise your prices. No doubt your input costs have gone up over the past year, its essential that you raise your prices accordingly. This will allow you to save more money as you prepare for the recession. And keep an eye on future input costs going up.
Establish a zero based budget. This is a simple approach to making sure you only spend what you need. Every single purchase has to improve efficiency, generate revenue, or end up paying for itself. All other purchases are delayed or denied. Its intense, but its easy to implement and ends wasteful or questionable spending. Download the free zero based budget flow chart below.
Pursue clients that will do well, recession or not. As you focus on getting new business, take a close look at businesses that are recession proof. Getting some of these clients into the fold will help you have consistent business during a recession.
Stay focused on your company culture. Part of making your business strong enough to weather a recession is making sure your team is strong. Its easy to lose site of culture when you're fretting about the future. Keep your team aware of the mission and what the company is doing to get through difficult times. Brief them on whats going on, so they have it top of mind and could possibly provide ideas you haven't thought of. Plus they'll be aware saving money is even more important and will keep this in mind when making day to day decisions. Celebrate victories and keep moral high by focusing on keeping your employees happy and healthy.
So there you have it. Time for you to get to work on your plan and keep an eye on the financial news. A lot could happen between now and Spring 2022. I could very well be wrong about the timing of the recession. Regardless, it makes sense to plan for it anyway. That way you'll be in good shape either way and have one less thing to worry about.