Prepare for the Recession
Things look great. Corporate profits are holding. People are traveling. Americans are buying everything including technology, cars, and homes.
But a recession is coming. While most business leaders are optimistic by nature, I prefer to deal with probabilities. I led our association through the pandemic by being realistic and planning for it early, being honest with employees that it would last a long time, and even canceling the physical version of the world's largest business event, the CES, seven months before its January 2021 scheduled date. That willingness to face reality allowed us to plan for the pandemic in February of 2020 with work from home drills before the actual pandemic hit and by canceling our physical event an unprecedented early seven months out--saving our industry participants money and allowing them to reallocate resources and plan.
Here is why I have a high degree of certainty that a recession is coming:
Negative Gross Domestic Product (GDP) Growth Helps Define a Recession?
A recession is defined as two consecutive quarters of where GDP falls. Yesterday’s "surprise"?news?of negative GDP growth in the first quarter of this year means we are halfway there and may officially enter a recession three months from now. Even if we don't have negative growth in the second quarter, we could be there in nine or 12 months.
Supply Chain Woes Will Remain
Chips remain in short supply, and it will take years for new plants to be built. Commodity and component prices are high and climbing as worker shortages and backed up demand strain supply sources. The port situation is only slowly improving and now has spread to China where shippers wait dead in the water outside major ports due to a shortage of truckers caused by the Covid lockdown. Meanwhile the rush to electrify cars and supply products to consumers investing more in their homes and less in corporate offices is only slowly being met by supply chain changes. In 2020, CTA predicted supply chain challenges beyond the short term. I fear, our industry and others, for multiple reasons, will still face supply problems.
The American Government Spigot is Shut
The extraordinary deficits from Covid,?combined with giveaways for a range of programs and even student loan forgiveness,?may have ranged from the necessary to the political vote buying - but it did fuel demand and growth (and inflation). Even many Democrats have stopped pushing hard for "Build Back Better" and other government largesse given the growing debt, worker shortage, and the fact these programs will contribute to inflation. Although President Biden is trying to figure student loans on a large-scale, Congress is unlikely to approve, and any Executive order will be legally challenged and politically questionable given the ethics and further inflationary impact.?Extra money from Congress will go to Ukraine or Covid. The government cannot fuel demand and fight inflation at the same time. And increasing taxes on the wealthy will hurt GDP and investment.?
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The Russia-Ukraine Situation is Far from Over
The world is on edge and economic activity will be inconsistent with citizens horrified and scared about nuclear threats. While consumers in post-pandemic mode will invest in experiences, they may be sporadic and panicky if the conflict expands. Remember the toilet paper being hoarded at the pandemic onset? Expect similar behavior if the Russian?conflict expands.
China is in Trouble
China is clinging to an unworkable Covid policy with officials afraid to pivot before?President Xi’s?third term beginning?later this year. While China's 100 percent containment policy and use of its own non-RNA vaccine minimized Covid deaths early on, the policy is failing now as China has almost no herd immunity and its unique vaccine is considered less effective against the omicron variant. Today, millions of Chinese are confined to their homes and Omicron appears to continue to spread. These shutdowns, confinements, and continuous testing of truckers as they enter areas, are hurting the Chinese economy, especially China's ability to manufacture and export. Unless China changes its shutdown policies and switches its vaccine and rapidly vaccinates, the rest of the world will suffer as?China becomes an even more unreliable manufacturer. With shortages and delays of commodities, components,?and products, the global supply chain will continue to be challenged. Companies will increasingly seek to disentangle from China, but this will take decades.
Expect Inflation in the Short to Mid-term
Inflation usually leads to recession. While we may see ebbs and flows of various inflation inputs, the wage-price spiral and cost of supply will be with us for some time. The fed has little choice other than to raise interest rates. This will depress investment and reduce consumption and should dampen the demand side of the inflation spiral. The other way to reduce inflation is to increase productivity - which means longer hours working or greater use of technology. As many Americans seem to be cutting back on work - the opportunity remains with greater use of technology - which requires investment and training. Savvy companies are undergoing a digital transformation which should help their competitiveness and dampen inflation. But meanwhile, consumers?spending money on higher food and fuel costs and housing will be spending less money on many other discretionary activities. This means many industries will suffer.
You can choose to be Pollyannish but like the umpire I was as a teenager - I just call the balls and strikes. On BBC in 2017 I raised the alarm bell about pandemics affecting major gatherings of people. In January 2020, my wife?(a doctor)?and I raised the alarm bell on Covid with our top outside board members, cautioning it would affect the world and have?a huge impact on everything from social unrest to the stock market.?A year ago, I declared as loud as I could that inflation would not be transitory and declared the worker shortage was a huge issue.?In fact,?I?published?a piece on how Washington?was?in denial of?these facts.
I believe this economic slowdown will turn into a recession. I hope I am wrong.
Vice President at Max Borges Agency | Driving Strategic Partnerships & Revenue Growth
2 年Sobering, clear-eyed view. Thanks for sharing your well-informed thoughts.
President, Tradeshow & Event Solutions, Inc
2 年Excellent discussion of the situation and where the economy may headed in the 2nd quarter 2022. We need to be diligent and prepared for what lies ahead. We cannot buy our way out of every problem we seem to find as an economic hurdle just to appease voters, such as the student loan forgiveness concept. The growing government debt seems to only add to our potential growing inflation and recession concerns.
High tech Executive | Startups founder | CSMO @ TRASNA| Co-Founder & Board Member@Mext B2B Metaverse |
2 年Thanks
Retired April 30th, 2020!
2 年Spot on, Gary. Thanks for posting.
39 year old family market research & consulting business ? Smart Home ? Energy ? Streaming ? CTV ? Broadband ? Connected Health ? SMB ? Multifamily ? Market Research ?Consulting ? Marketing Services ? Thought Leadership
2 年concerning times...