5 Ways to prepare your company for the recession

The recession is not knocking at our front doors yet, but it is on its way. When it arrives, it won't be a great houseguest, and when it leaves, our lives will be a little worse for the wear.

Connor Lokar and his colleagues at ITR Economics forecast a mild recession late 2023 and into 2024.

That was one key take-aways from Connor Lokar's talk on the economy for the Association for Corporate Growth Kansas City today.

Here are three others:

🔴 Data removes emotion from economic forecasting. The data says a recession is coming whether we like it or not...whether we see it today or not. Don't be fooled into poorly managed spending, hiring, or inventory because the recession is not on your doorstep. The data is clear: a recession is on its way. Plan accordingly.

🔴 The pace of growth for your company will likely slow down this year and next, Lokar said. When you reflect and research reasons, there will be external ones related to the economy.

While the economic data expert intimated the slower pace of growth can be blamed entirely on external factors, I disagree with him.

It is tempting to blame missed targets on external factors, like the economy or supply chain; however, do not let those become excuses that prevent you from looking at internal factors as well. It's easier to blame external factors than to take responsibility for internal things like operation or leadership failures, but if you want your company to grow, have the courage to take the hard look in the mirror.

🔴 For most sectors, there is residual excess demand caused by the stimulus from the last two years, so it might look like things are okay right now. That demand will slow later this year, which will lead into the recession in 2024. The recovery will be in 2025.

Other sectors, like commercial construction, lag. Non-residential construction is a great place to be this year but needs to carefully plan for 2025-2026.

The main thing is: a recession is coming.

As Lokar said, we're about to come off a sugar high.

Picture going out for lunch with friends on a Friday afternoon. Everyone eats a little more than a typical day and shares desserts, right? Then you all return to work. What happens around 3:00pm?

CRASH! There's a crash from the lunchtime sugar high.

Now, picture the afternoon meeting. Everyone’s energy is low, they are not focused, people don’t listen to each other, they are looking up stock prices on their phones. Nothing gets done during the crash after a sugar high until it wears off. Once it wears off, things return to normal.

The economy is likely to return to normal late 2025 or early 2026, according to Lokar. Esther George, president and chief executive of the Federal Reserve Bank of Kansas City, spoke a few weeks ago and predicted the same. (Esther George’s economic outlook talk summarized in three words: shock, shift, and shade)

The pandemic stimulus packages were like the desserts, and there is a price to pay so be ready.

Here are five ways organization leaders and founders can get their companies ready:

🟥 Evaluate your market. How will your customers and prospects be affected by the recession? When? Would it be wise to pivot now so you can serve another market when the recession comes? Think through this now to prepare instead of react if/when your customers can’t continue your engagements.

🟥 Plan budgets, hiring, inventory, and spending in anticipation of a recession for Q4 2023 and into 2024. If you don't have the backlog of business booked by then, budget accordingly.

🟥 Plan for recovery in 2025. Keep in mind, if you lay off your staff, you will need them back. Be honorable in how you treat people during the good times and hard times because it will affect whether you become an employer of choice or not.

🟥 Discuss plans for big purchases or sales with your banker or business broker asap. It might be wise to delay selling your company until the recession ends but wise to purchase one now if you have cash. Taking on debt now may be risky with the recession looming.

🟥 Protect your team. It might behoove you to build your liquidity so you are able to keep your strong talent if business declines for several months ahead. If you are in a sector where the business will come back, you might beat your competition who lays off their people during the recession.

🟥 Plan for the succession of your leadership team. How would a recession impact retirement plans of key leaders? How would adjustments in their plans alter the leadership on the bench? How will you keep all of the folks engaged, developing, aligned with their personal and professional goals?

According to Lokar, the data is clear: a recession is coming.

It is also clear that companies do not have to sit around waiting for it. You can prepare and plan, so your company capitalizes on the recession rather than becomes crippled by it.

Esther George’s economic outlook talk summarized in three words: shock, shift, and shade

Esther George kicked off her tenth and final year as president and chief executive of the Federal Reserve Bank of Kansas City by sharing her economic outlook with Central Exchange (CX) today.

She thanked CX in her opening comments for being her first big public speech and for this annual opportunity. She also said, “CX has been an important part of Kansas City’s success as it provides support for women to develop their leadership abilities and contribute to the momentum in our community. Our partnership with CX has benefitted a number of women leaders here at the Kansas City Fed, including me.”

We got into the current inflation situation because of two main things:

⬛ Shock. The shock of Russia’s invasion of Ukraine affected energy and commodity food prices most of 2022. The shock of the pandemic took its toll on prices and systems too. Both of those ended up affecting business and household purchases across the globe.

⬛ Shift. The shocks led to significant shifts between supply and demand, which caused an imbalance and fluctuating prices. Remember those photos of ships packed with goods waiting to deliver to US shores? Now, those ships are gone. Supply is stable, demand for those goods has stabilized, and prices have too. Demand for some services has increased, however, but supply is low because of the tight labor market. The shifting patterns contributes to the economic situation.

President George was very clear that the Federal Reserve is committed to restoring economic stability. She mentioned that the longer inflation sticks around, the more we consumers and business leaders plan around it, which makes it harder to influence.

⬛ Shade on the path. There are four unknowns preventing a crystal clear path for the Fed as it walks the path forward. President George anticipates inflation could be with us in 2025, and these issues shade the forecast.

1) Global outlook remains unsettled. The US is not going to get a boost from Europe or China. They have their own economic challenges right now.

2) Household liquidity. As spending during the pandemic was curtailed, US households saved a lot more of their incomes. Are we all going on spending sprees or keeping our money? Our choice will affect the economy.

3) Reduction of the Fed’s balance sheet. This goes back years and was interesting to hear about. The Fed bought assets to boost the economy during the last recession of 2008-2009. Now, it needs to get rid of those assets to bring its balance sheet down to the size it should be to do its job. The Fed should not be so big that it influences the markets, so this is a good thing but it takes time.

4) Tradeoffs between inflation and employment remain complicated and difficult.

President George made a remark at the end of her talk that demand is not the be-all-end-all cure for growth. Apparently prior to the pandemic, the Fed focused most of its economic solutions around boosting demand. As we have seen in recent years, however, there are supply issues to face when demand increases. When demand was boosted, the supply could not meet the demand, and that caused gigantic issues for the economy.

It caused issues for people.

Those are issues the Federal Reserve will face as President George retires at the end of this month.

During the Q&A portion of today’s talk, President George was asked to share a key lesson learned over her career. She answered saying she found “an organization that was supportive if you were willing to put in the work.”

There’s something to ponder: is your company supporting you (assuming you are putting in the work)? Or, do they keep giving you more work, assigning more teams, putting you on more projects without any talk of a raise or promotion? If that’s happening, what are you getting out of that? What’s your end game?

Another question asked was about highs and lows of her career.

President George said the best part of her career is, “The people who work for the Federal Reserve take this seriously. They are attentive to what we have to do on behalf of the American public. They are the highlight of my career.”

There will be big shoes to fill after President George exits the Fed in a few weeks. She did not announce what is next for her. Here’s hoping she walks those shoes into another organization in Kansas City.