The Next Recession is Set to Reshape Our Economy. Here’s How.
October 17, 2017
Editor’s Note: This article first appeared on Inc. here.
With an unemployment rate of 4.3 percent and a bull market (at least at this writing), the late summer of 2017 looks like a Goldilocks economy: There’s steady growth that’s not too hot and not too cold. Inputs (e.g., employees and equipment) aren’t too expensive or too cheap.
That means just one thing: a recession is coming.
Not to be a killjoy, but historically there have only been two expansions that lasted as long as this one. To match the 120-month boom in the 1990s, we’d need the economy to keep growing past January 2019, an occurrence that The Wall Street Journal deems “a very tall order.”
Before you reach for the Xanax though, consider that, like any economic event, recessions are unpredictable. Because of the widespread use of data and a more agile approach to business, more companies might be able to ride out and even profit from the next downturn. But the economy might look different when it’s all over.
Recession 2019 — or whenever
Growth until early 2019 or so assumes that there will be no geopolitical shocks between now and then. That’s a big assumption considering how our current administration has been flirting with nuclear war with North Korea and India and China’s summer border skirmish. Closer to home, there’s a reasonable chance that our current president will implode because of his historically low popularity, a fight with his own party and a looming investigation of Russia’s interference in our last election. Then there’s always the chance that the Federal Reserve will raise interest rates too quickly and engineer a recession. Wall Street has shrugged off these concerns, but that can’t last forever.
Meanwhile, the economy will keep running its cycle. Recessions happen because labor grows scarce and wages climb, which prompts businesses to ease back on hiring and the Federal Reserve to raise interest rates, which has a braking effect on the economy. In general, the longer it takes for these events to occur, the longer the recession will be. A recession in 2019 would likely be short but one in 2021 might be a bit more brutal.
Go about your business
Whatever course the economy takes, business owners would be foolish to try to time the market. The best course of action is to keep a tunnel vision on your business. Is demand ebbing? Is it time to cut back on resources? Are you adding new customers? You might see signs of a slowdown before the media latches onto it or your segment might keep humming along despite a recession.
While you don’t need to plan specifically for a recession, best practices for running a business — like ensuring that there’s enough liquidity on hand to weather a crisis — will prevent business owners from acting rashly. It’s also a good idea to entertain various scenarios, like a 20 percent downturn in revenues, to see how that would affect profits and what the best course of action is likely to be.
Reshuffling the deck
Inevitably, some companies will view the next recession as an opportunity to seize the moment and grow their share of the market. A 2010 Harvard Business Review study found that just nine percent of all companies emerged stronger after a recession while 17 percent of companies were wiped out.
The companies that thrived during a recession didn’t cut back the fastest or invest the most, but found a middle ground between cutting costs to survive in the present and investing for tomorrow. In other words, companies that are thoughtful about such moves and set emotion aside fared the best.
The good news is that more so than the last recession, I expect that companies in the downturn of the late teens/early 20s will draw on data and modeling to make these decisions and take a more agile approach to staffing. That means that because many companies are already used to running their business on data during the boom, they will be able to use data to navigate the bust.
One other possibility is that these and other companies will invest more in AI and other automation techniques to permanently replace workers, which could prolong the recession and alter the economy in a lasting way. And who knows what will happen then? All the more reason to enjoy the good times now for however long they last.