Officially, a recession begins with two quarters, back to back, where the nation’s gross domestic product (GDP) declines. By the time this column goes to print, we will likely be in an official recession. But you need not despair. Recessions can be good for businesses that approach them correctly. Here are 10 reasons for optimism in a recession.
1. Most Recessions Are Mild
If we ignore the COVID recession, which was short, steep, and caused by government-imposed lockdowns, our last downturn was the “Great Recession” in 2008/2009. It is remembered as one of the worst recessions in the post-World War II era. It lasted 18 months and GDP dropped 4.3%. Before the Great Recession was the “Dot-Com Recession,” which lasted eight months and saw GDP contract 0.3%. The “Gulf War Recession” in 1990 lasted eight months and saw GDP contract 1.5%. The twin recessions of 1980 and 1981/1982 lasted six months and 16 months, respectively. GDP declined 2.2% and 2.9%, respectively.
In the HVAC industry, we face seasonality swings every year that are far more extreme than the deepest recession in the last 40 years. The fact is that most recessions are mild. It is our reactions that tend to be extreme. While they are not fun, recessions can be endured.
2. Business Owners Control Their Own Destiny
This has been a bad year for investors. Year-to-date at the time this was written, the S&P 500 of large U.S. equities was down 16.21%. The Russell 2000 of small U.S. equities was down 18.02%. The S&P 700 of international equities was down 17.36%. Fixed income indexes are not much better. The Bloomberg Municipal (Muni Fixed Income) was down 7.6%. The Bloomberg Aggregate (Taxable Fixed Income) was down 10.18%. Be grateful that investment income is not your sole source of income this year!
Unfortunately, business owners at all levels of the HVAC industry are affected by the economy as a whole. However, they have an ability to influence their business’ performance despite the economy in ways investors can only dream about.
In the Great Recession, the economy declined 4.3%. Most business owners could rally the troops and make up a 4.3% hit with a little extra effort. This is significant. Business owners really do control their own destiny.
3. Your Competitors Will React Poorly
When a recession strikes, most business leaders panic. They batten down the hatches. They try to save their way to prosperity. They find marketing and advertising easy to cut, so they do. Thus, at a time when consumers are more wary and it gets harder to find a customer, some business leaders quit trying. To the public, they all but disappear. And while businesses and consumers may be wary of expenditures in a recession, they will spend money to stay cool in the summer and keep warm in the winter.
4. Some Competitors Will Fail
It is tragic when any business fails. A business failure represents more than a loss of jobs and livelihoods. It is more than an economic statistic. It is the death of a dream, hopes, and ambitions. Yet every year, businesses fail. In a recession, more will fail than normal. This will include some of your competitors.
While tragic to the competitor, fewer competitors represents a gift for the survivors. Moreover, the threat of closure incentivizes some business owners to consider and accept acquisition offers at lower prices than they would otherwise consider. For business owners with strong balance sheets, recessions represent opportunities to buy market share at a discount.
5. It Is Easier to Find Employees
When a company fails, its employees must land somewhere. That makes recessions hiring opportunities for strong companies. Plus, even companies that survive might lose employees if the employees get nervous about company stability. Market your ability to grow through the recession and you will appeal to people seeking security.
6. Turnover Is Reduced
Just as recessions present opportunities to pick up employees from other companies for stable and growing businesses, they reinforce the benefits of working for a solid company during a time of trial. Accordingly, turnover is reduced in strong companies. The grass does not appear greener on the other side of the fence. The grass appears greener at home, where it is growing.
7. It Is Easier to Gain Market Share
It is hard to gain market share in a robust market. When everyone is prospering, it is harder to gain ground on the competition. During a downturn, when competitors are pulling back, the companies that maintain or accelerate their marketing gain share. When the economy turns, they discover that the share gains are all but permanent. Absent a recession, it would have been impossible to make market share gains over the same time period.
8. It Forces Efficiency
Downturns do add a clarity to the necessity of cutting expenditures. In good times, it is natural for company overhead to get fat. During a recession, expenditures get tested. Do they add to sales or save expenses? If not, this is a great time to cut them.
In good times, business leaders might also carry less productive employees. Recessions press business owners to consider how every employee truly impacts the bottom line and cut those who cost more than they add.
9. It May Tame Inflation
This year we have seen the greatest inflation rates in decades. A recession should help tame inflation. As the great economist Milton Friedman noted, inflation is always a monetary problem. With COVID, starting with the Trump administration and continuing today, the Federal Reserve has dramatically increased the number of dollars on the market with Quantitative Easing (i.e., the Fed just created money out of thin air).
The inflation we are seeing today is simple supply and demand. When the supply of money increases beyond the productivity rate of the economy, we end up with an excess supply of dollars. Their value falls.
The Fed is now playing with Quantitative Tightening and interest rate increases. If they play it right, these moves and a recession will tame inflation. If they get it wrong, we might get stagflation, where we have high interest in combination with high unemployment. Print too much money and we might get hyperinflation. Print too little and the economy tanks (i.e., see the 1930s).
The Fed can theoretically get today’s inflation under control without causing a recession. However, a recession accompanied by higher interest rates makes it more likely that inflation will be tamed. Still, it is uncertain whether the current leadership at the Federal Reserve is willing to endure the short-term pain required.
10. Recessions are Temporary
Since 1980, recessions have averaged less than 10 months in duration. Go back to 1857 and the average is 17 months. A recession ranges from an economic cold to the flu. It’s uncomfortable, but endurable. Healthy companies entering a recession are just like healthy people getting the flu. The agony is less. Companies (and people) with comorbidities will have a harder time getting well.