Is recession around the corner? Here is what you could do to brace for impact!

Economic downturn might be just around the corner. Or it is not. We have no idea, and its impossible for economists to figure this one out, again. Some signs paint a bleak picture. Just one year ago effective #Fed funds rate was at 0.1%, and today it is at 4.6% - sharpest raise in decades if not ever. And, as #inflation did slow down but it is still very high, and while employment data is still very strong, Fed might need to break the wheel and raise to 6-6.5% before inflation is stopped. Powell (Fed’s chairman) said they will do whatever it takes. Currently, yield curve inversion (when government’s cost/interest to borrow money short term is higher than for long term) has not been steeper since just before Great #Recession (2007). Historically, this has been an omen of recession. At the end, theoretically Fed wants to reverse the policy just in time after inflation is broken, but before the same happens to the #economy, but it is not a switch! Historically, being late is more often with Fed, because, again, there is simply too much noise in the economic #data. ??

Other signs shows that we are still fine. Forward looking earnings of stock listed companies in USA are peaking again for Q4/23. Despite highest in 2 decades interest on financing a car purchase, demand seems to be so much greater than car supply, and used car prices are raging again. Mortgage interests is as well raging in USA, a bit less in Europe, but delinquency rates seem not to budge at all. Employment is pretty strong. Lack of labor is omnipresent. In Europe, some property markets started deflating, some are stable, some are blowing up previous records, but nowhere do you see bubble bursting. At least yet. All these point into opposite direction, that this time might be different, and we might get through this mega cycle of rates lifting without major recession. Or are we just at the peak and it seems calm, just before the storm?

All in all, a #manager or #entrepreneur is left alone to figure it out, through all the data noise and conflicting signs. At the end, it is judgment call that is linked to your particular business, market or industry. If you believe recession might be on the way here are things you can do to brace for impact:

1.??????Build a war chest – pay close attention to your cash flows and try to build it up. Having a lot of cash can be very fruitful in a recession, as opportunities and businesses might get much cheaper and you could snatch it up. It is somewhat counter intuitive, as inflation is eating away the value, but in recession times, equipment, industrial property, struggling companies are much, much cheaper. You can protect yourself from inflation somewhat with short term government bonds (5% on US 2y for example).

2.??????Test your muscles – your company will usually have several units, or products in business portfolio, maybe even some subsidiaries etc. Test how would the P&L of each of these segments react to 10% drop in value or volume of sales (or whatever is appropriate number for you – good hint, what has happened in previous serious recession in your industry is a good ballpark). What happens if your margin shrinks by 5%? What costs you will not be able to decrease should previous two things happen? How much time, effort and money do you need to cut the others? And if you do not know what your segments are contributing to your overall P&L now is the perfect time to figure it out. ?Being aware about these numbers and potential actions, before you might need them at hand, is good way to be agile and prepared for fast turnaround, should the storm hit you. It costs bit of effort and time now, but it is kind of paying insurance.

3.??????Cut some slack – do you have pricy conference for your sales team that for years serves more as team-building event than lead generation? Do you subscribed to services, market analyses that was not red in months? Do you have some nice to have assets that do not bring true value to your customer? Things that do not get converted in customer value, now or in the future, should be reevaluated. Now is the time to put that money aside, be stoic about it!

4.??????Double down on efficiency – if you have started some IoT, digitalization or optimization project that will yield #efficiency in the future, but the project is lagging behind, now is the time to finish it up, and try to do that fast. Also, some long term R&D that is promising a lot, but your company was slow to finish needs to be put to shape now. Either it works soon or you pace it down a bit. Money and time for future is cut first once the recession fire begins, so spend it now, when you have it, on the efficiency you might desperately need in 6-12 months.

5.??????Demand more from your investments – do you have #investments in the pipeline that do not return value but are nice to have? Do not do it, at least for now. New building, with better offices that your employees deserve might be a good thing to postpone. They will deserve it more in a year or two. Projects on the margin, those that bring just a bit above current cost of capital should be either improved or also postponed. Maybe you do not know for each major investment a return and cost of capital profile (hint you definitely should know)? Figure it out. Now is not the time to throw away the dry powder. The key view should be: does this next thing I want to buy brings value to my customer or makes me better to perform service to them? If answer is "I am not sure", you should be, as well, hesitant to put the money down.

There are more stuff you could do, and also more that you should not. It is, of course, depending on the context, and circumstances, special to you, your business, and your industry. If you do not have resources internally to figure these questions out, professional help can be at your service to support you. If you are interested on how we could help you get in better shape for possible recession, please do not hesitate to contact us at [email protected]. We will be happy to evaluate your situation and figure out how you may set yourself for long term success, beyond the recession horizon.