Everyone seems to be worrying about a recession as inflation spikes, the stock market gyrates, the Fed raises interest rates and the first layoffs are announced by Tesla and other tech companies. A recession is defined as two consecutive quarters of negative Gross Domestic Product (GDP) and this week the U.S. Bureau of Economic Analysis revised 1Q22 GDP downward to -1.6%, so we’re officially halfway to a recession. Many economists expect positive GDP growth in 2Q22, avoiding a recession, at least for this year. But those same economists are worried about a recession next year. It’s certainly natural to worry about recessions and the losses and layoffs they typically bring. The recent Great Recession in 2008-2009 was scarier than most and included a subprime mortgage crisis that cratered the housing market and almost destroyed our financial system.
So what should you do as the owner/operator of a manufacturing business if you’re worried?
First, stop worrying. Recessions are a fact of economic life. They’re “normal” and show up quite regularly every six or seven years on average. So a recession certainly IS coming, it is only a question of when. In reality, worrying about a recession can actually be a self-fulfilling prophecy. If enough businesses and individuals curtail their spending and investment based on concerns about a pending recession, they can actually create or hasten the recession they fear, and/or make it worse.
Second, don’t wait for a recession to get your house in order. When recessions arrive, most businesses end up scrambling to cut costs, improve efficiency, manage cashflow, jettison under-performing assets and diversify their customer base—actions that could have and should have been taken before the recession hit. Running your business well should always be your mantra, in good times as well as bad. Businesses that are already efficient and competitive, with control of their finances and cashflow, are better positioned to weather a recession than those who aren’t. So keep making improvements, keep investing to become more competitive, whether a recession is here or not.
Third, be strategic about managing your expenses. Cutting costs is a natural reaction to recessions, but it must be done carefully. In 2000, Sony cut its capital spending 23%, its workforce 11% and its R&D 12% in response to that recession. Although those steps increased Sony’s profitability, they stunted sales growth which fell from 11% pre-recession, to 1% post-recession, leaving Sony struggling to recover ever since. If you do need to cut costs, don’t make blanket cuts across the board. Pick those areas that need and deserve trimming and leave high-priority and high-potential activities alone. For example, marketing and advertising are the first places many companies look to economize in a downturn since they don’t directly affect your staff, your products or your customers. But you will want to be in front of your customers in a recession to stay top of mind and retain their business. In the Great Depression, market-leader Post Cereal’s decision to cut their marketing and advertising spend, while Kellogg’s actually increased theirs, helped Kellogg’s profits grow over 30% and made it the dominant cereal brand for decades to come.
Finally, prepare to capitalize on the opportunities that recessions inevitably present. As the Post-Kellogg’s story illustrates, hard economic times can still be good for some businesses. You may be able to take advantage of layoffs, losses and other recessionary byproducts. Workforce has been a challenge for manufacturers for years, so hang on to your key people and consider hiring more when others make layoffs. You may want to prepare now for potential acquisitions, to grow your top line and your capabilities, if attractive companies struggle during a downturn and become available.
Yes, recessions are worrisome, but instead of wringing our hands, let’s keep working on our businesses and preparing for post-recession growth that’s sure to follow.
Recession Suggestions
Everyone seems to be worrying about a recession as inflation spikes, the stock market gyrates, the Fed raises interest rates and the first layoffs are announced by Tesla and other tech companies. A recession is defined as two consecutive quarters of negative Gross Domestic Product (GDP) and this week the U.S. Bureau of Economic Analysis revised 1Q22 GDP downward to -1.6%, so we’re officially halfway to a recession. Many economists expect positive GDP growth in 2Q22, avoiding a recession, at least for this year. But those same economists are worried about a recession next year. It’s certainly natural to worry about recessions and the losses and layoffs they typically bring. The recent Great Recession in 2008-2009 was scarier than most and included a subprime mortgage crisis that cratered the housing market and almost destroyed our financial system.
So what should you do as the owner/operator of a manufacturing business if you’re worried?
First, stop worrying. Recessions are a fact of economic life. They’re “normal” and show up quite regularly every six or seven years on average. So a recession certainly IS coming, it is only a question of when. In reality, worrying about a recession can actually be a self-fulfilling prophecy. If enough businesses and individuals curtail their spending and investment based on concerns about a pending recession, they can actually create or hasten the recession they fear, and/or make it worse.
Second, don’t wait for a recession to get your house in order. When recessions arrive, most businesses end up scrambling to cut costs, improve efficiency, manage cashflow, jettison under-performing assets and diversify their customer base—actions that could have and should have been taken before the recession hit. Running your business well should always be your mantra, in good times as well as bad. Businesses that are already efficient and competitive, with control of their finances and cashflow, are better positioned to weather a recession than those who aren’t. So keep making improvements, keep investing to become more competitive, whether a recession is here or not.
Third, be strategic about managing your expenses. Cutting costs is a natural reaction to recessions, but it must be done carefully. In 2000, Sony cut its capital spending 23%, its workforce 11% and its R&D 12% in response to that recession. Although those steps increased Sony’s profitability, they stunted sales growth which fell from 11% pre-recession, to 1% post-recession, leaving Sony struggling to recover ever since. If you do need to cut costs, don’t make blanket cuts across the board. Pick those areas that need and deserve trimming and leave high-priority and high-potential activities alone. For example, marketing and advertising are the first places many companies look to economize in a downturn since they don’t directly affect your staff, your products or your customers. But you will want to be in front of your customers in a recession to stay top of mind and retain their business. In the Great Depression, market-leader Post Cereal’s decision to cut their marketing and advertising spend, while Kellogg’s actually increased theirs, helped Kellogg’s profits grow over 30% and made it the dominant cereal brand for decades to come.
Finally, prepare to capitalize on the opportunities that recessions inevitably present. As the Post-Kellogg’s story illustrates, hard economic times can still be good for some businesses. You may be able to take advantage of layoffs, losses and other recessionary byproducts. Workforce has been a challenge for manufacturers for years, so hang on to your key people and consider hiring more when others make layoffs. You may want to prepare now for potential acquisitions, to grow your top line and your capabilities, if attractive companies struggle during a downturn and become available.
Yes, recessions are worrisome, but instead of wringing our hands, let’s keep working on our businesses and preparing for post-recession growth that’s sure to follow.
