The End of The Runway? As recession looms, experts offer advice to stay aloft

The U.S. is not officially in a recession, at least not according to the National Bureau of Economic Research, the body in charge of making that declaration.

A recession is commonly defined as two consecutive quarters of declining gross domestic product. But the NBER offers a different definition: “a significant decline in activity that is spread across the economy and lasts more than a few months.”

The nation’s GDP declined 1.6% in the first quarter of 2022 and fell another 0.9% in Q2, according to the U.S. Bureau of Economic Analysis.

However, NBER looks at more than GDP, and one major factor in its determination of recession status is unemployment – now at a historically low rate of 3.5%. The Labor Department’s July jobs report, released Aug. 5, found the U.S. economy added 528,000 jobs in the month, with average hourly wages rising by 0.5% for the month and 5.2% year over year.

Scott Colbert, chief economist with Commerce Trust Co., said the probability of a recession is clearly increasing as the nation’s economy moves further away from huge government stimulus.

“The Federal Reserve is taking the punch bowl away and making financial conditions tighter,” he said.

According to Colbert, the country came out of the 2020 recession at a record pace because of government stimulus. A more typical recovery is slow and sluggish, like a B-52 bomber; it takes a long time to get down the runway.

“Basically, we came out with an F-16,” he said. “We moved down the runway very, very rapidly with the strongest growth we’ve had.”

An exceptionally strong recovery early on probably moved the country down the runway faster than we could handle, Colbert said.

“The analogy here is the end of the runway is into a recession,” he said.

Bracing for what’s to come
Whether the economy takes off or skids off the runway is yet to be seen, but Colbert cautions that financial markets indicate the latter. For instance, the 2-year Treasury note has a higher yield than the 10-year.

“Historically, if it stays like this a couple of months, that, on average, has predicted a recession within the next 18 months eight out of eight times,” he said.

He added that when the unemployment rate has been less than 4% or the inflationary surge has been more than 4%, the Fed has never been able to soft-land the plane back on the runway.

“The fighter jet crashes. That’s the recession,” he said. “This is what people are worried about.”

But every recession is different, Colbert said.

“The key attribute that has accompanied every recession that we’ve had since the end of World War II has been declining employment or increasing unemployment,” he said. “In recessions, we tend to lose employment. That’s why the Fed, and us, too, are highly certain that we are not in a recession.”

He noted that the country is in a growth recession right now; while the economy is growing at an 8% pace, inflation has grown by 9%.

“There’s been no growth to the economy because inflation has eaten it all up,” he said.

Your own mask first
A looming recession brings plenty of concerns to business owners, among them the well-being of workers and investors who rely on them, as well as the customers they serve.

There are steps business owners can take to gird themselves against a possible recession. Jason Flores, chief investment officer at Central Trust Co., offered two pieces of advice at Springfield Business Journal’s recent Economic Growth Series workshop.

Flores said businesses need to take care of employees and examine processes.

When he was in the military, he said people talked about who they wanted to go into battle with. It’s the same with business.

“You always want to keep those core employees,” he said. “Who are the people that I need to make sure are on my team at all times?”

Flores said small businesses may not be able to compete on wages, but offering benefits like child care reimbursement or flexible working hours may offer a chance to retain essential staff.

Related to business processes, Flores said solutions are not always technology oriented. He suggested thinking about what customers really want.

“If you really want to recession-proof your business, you need to know who your client is and what they want,” he said.

He gave the example of The Ritz-Carlton Hotel Co., which examined its practice of having housekeeping staff make elaborate swans out of towels. The company learned that customers did not really value towel swans as much as they did clean, soft linens. Thousands of payroll hours were saved when the practice was eliminated.

“It’s really simple to think we’ve always done it this way,” Flores said. “The question is always: Is it efficient?”

Small-business advice
As technology and commercialization specialist with the Missouri Small Business Development Center at Missouri State University, Sandra Smart has been helping business owners prepare for what’s to come.

Smart said without cash, it’s hard to keep the doors of a business open by paying for utilities, rent, salaries or product.

She said business owners should aim to have a keen understanding of their cash flow, historically and in terms of what is to come. Especially in an uncertain time, they should be sure to have a process in place to collect receivables in a timely fashion.

“Everything gets tight, and everyone tries to stretch payments as far as they can,” she said.

A good process might include friendly reminder emails to trigger potential payments.

Additionally, business owners should have a strategy in place for making their own payments. Rather than paying early, they may want to look at the terms of payables and hold on to cash as long as they can. Additionally, they should be sure to have communication with vendors if they anticipate having problems coming up with a payment.

“Just have a strategy in place – think it through,” Smart said. “It doesn’t have to be super detailed.”

She also suggested the practical step of looking at expenses, including subscriptions and memberships that may have made sense at one point but don’t anymore. Likewise, business owners can take a hard look at expenses, like extra lunches, travel or bulk buying of office supplies.

“It might be a good idea to scale back to help weather the recession,” she said.

Smart cautions against making a kneejerk decision to cut staff.

“It’s hard to get people back, and training new workers adds additional costs,” she said.

Having the right people in the right places to maximize their talent can be a source of strength during a recession, according to Smart. They might have good ideas for new ways to engage customers to increase revenue.

Smart suggests looking at product or service pricing and increasing as necessary to offset costs, rather than fully absorbing everything. It also might be prudent to scale back and focus on core products or services, rather than trying to be all things to all people.

Most of all, Smart suggests remaining connected to customers by creating goodwill and focusing on service.

“When the money gets tight, for someone that has been friendly or provided excellent service, it makes it easier to spend money with them,” she said.