What Businesses Need to Do to Prepare for a Recession
Businesses that are not preparing for the possibility of a recession within the next year are gambling because experts put the odds of an economic downturn as a true coinflip.
“The median probability of a recession over the next 12 months is 47.5 percent, up from 30 percent in June, according to a Bloomberg survey of economists completed last week,” reported CNBC on July 20, 2022.
In March, those odds were just 20 percent. The latest survey was conducted July 8-14, with 34 economists responding about the chances of recession.
CNBC points out that recessions are officially declared by the National Bureau of Economic Research, which defines them as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Murky Crystal Ball: Mixed Signals in U.S. Economy
Economic forecasts have never been crystal clear, but the current crystal ball is murky with the U.S. economy sending mixed signals from high inflation to low unemployment to declining GDP to strong consumer spending.
“The Fed and economic forecasters are stuck in uncharted territory. They have no experience analyzing the economic damage from a global pandemic. The results so far have been humbling. They failed to anticipate the economy’s blazing recovery from the 2020 recession — or the raging inflation it unleashed,” reported the AP’s Paul Wiseman on July 27, 2022.
The Fed has been trying to throw cold water in the face of inflation by raising interest rates, which has spurred fears of a recession.
“The Fed hopes to pull off the triple axel of central banking: Slow the economy just enough to curb inflation without causing a recession. Many economists doubt the Fed can manage that feat, a so-called soft landing,” writes Wiseman.
July CPI Report Gives Hope but Recession Fears Remain
Throwing a curveball to the economic narrative is the release on Aug. 10, 2022 of the July Consumer Price Index (CPI) report that showed prices not rising month-over-month for the first time since May 2020.
The year-over-year inflation rate was 8.5 percent, below the expected 8.7 percent forecast, and down from June’s 40-year high watermark of 9.1 percent.
“The whole recession narrative really needs to be put on a shelf for now,” Aneta Markowska, chief economist at Jefferies, told CNBC. “I think it’s going to be shifting to a stronger-for-longer narrative, which is really supported by a reversal in inflation.”
With that being said, food prices continue to rise at a 10.9 percent pace (highest since 1979) and despite falling gas prices, overall costs at the pump are up 44 percent from a year earlier and fuel oil has increased 75.6 percent.
When (and if) a recession comes is anybody’s guess – Bank of America has forecasted a mild recession in the remaining months of 2022; Wells Fargo calls for a soft landing to mild recession in the first quarter of 2023; and Markowska, according to CNBC, “expects pressures to intensify in 2023, with a recession likely in the back part of the year.”
Business 101: Prepare for the Worst, Hope for the Best
Businesses looking at the 50-50 possibility of a recession should be a bit like a homeowner looking at an even chance that a hurricane will hit – prepare for the worst and hope for the best.
“Business fundamentals remain true regardless of whether larger economic conditions are favorable or in decline. However, there are certain tweaks and adjustments that must be made in order to weather stormy periods like the one we're preparing to face,” wrote Nate Nead in Entrepreneur.
Nead says that businesses can focus on 6 things to become recession ready:
- Build a Cash Reserve: While six months of basic business expenses can help ride out tough patches, Nead says having a year’s worth, if possible, would be ideal.
- Properly Manage and Collect Invoices: If you become lax now in collecting outstanding invoices, it will be even tougher when a recession hits and customers have cash flow issues.
- Trim Non-Essential Expenses: Trim the fat now by eliminating expenses that are not integral to generating revenue or sustaining your business.
- Renegotiate with Vendors: Prepare for a recession by getting favorable terms and rates from your vendors.
- Downsize and Outsource: Nead points out that outsourced contractors should only cost your business just 50 to 60 percent of what full-time employees cost. Outsourcing functions such as HR to a professional employer organization (PEO) like Employer Flexible can help save your business time and money.
- Listen to Your Customers: It is important to seek and analyze feedback from your customers, especially during a recession where they may have changing wants and needs.
“The most successful companies find ways to thrive in any economy. Whether larger economic conditions are positive or negative, they find ways to stay profitable,” concludes Nead.
HR Leaders: Business Tips to Prepare for Recession
The Society for Human Resource Management polled HR leaders for tips on how businesses can prepare for a recession, and they agreed with many of the points from Nead including trimming expenses, reducing vendor spending and assessing overall company financial stability.
The other 9 ways to prepare for a recession included:
- Make Priority Investments Now: It is not all about cutting expenses right now. Look for short and long term investments that can help fuel business opportunities and address current challenges.
- Ensure HR is Prepared to Make Cuts: Remember, prepare for the worst, so your HR department should have a grasp on where cuts can be made if warranted when a recession hits.
- Invest in Organizational Design: Sometimes organizational restructuring can stave off cutting staff so examine how you can streamline your organization.
- Support Your Team: Make sure you have support in place to help your employees deal with the effects of a recession.
- Ensure Job Openings are Truly Needed: Analyze vacant positions to make sure they are absolutely needed for the success of your business.
- Train Your Managers Ahead of Time for Tough Conversations: There are right ways and wrong ways to handle layoffs (hint: posting crying selfies would be the wrong way).
- Be Transparent: If the COVID-19 pandemic taught HR anything it is that transparency and communication is crucial to surviving a crisis.
- Provide Internal Mobility and Reskilling Programs: In good times, reskilling and training opportunities for your staff can help with retention and engagement. In a recession it can help cover staffing shortfalls and prevent layoffs.
- Include DEI in Your Recession Mitigation Plan: Diversity, equity, and inclusion (DEI) programs can help companies outperform those that do not offer them in times of recessions and for years after according to study by “Great Place to Work”.
Need a partner to help prepare for the possibility of a recession? Contact Employer Flexible today for insight and guidance on what steps your business should be taking.