The financial media loves to sell an image of recessions as cleansing fires, roasting out all the weak businesses and uncovering all those buried opportunities. I consider this narrative very perilously rosy. Though some will come through untouched, or perhaps even in a more advantageous position, the truth is much more dire for the majority of businesses. What is a springboard for some can be a death knell in a downturn.
The idea that recessions create a fertile ground for creativity, experimentation, and investment is a myth. Although innovation is an important part of getting through these challenging times, the cold reality is that many companies are focused on just keeping their heads above water. Limited access to capital, decreased consumer spending, and pervasive economic uncertainty all inhibit risk-taking and long-term investments. Businesses batten the hatches, redirecting their attention from investing and growing to trimming excess and making it through.
A second common argument is that a recession just reduces one’s income for a short period of time, maybe 5% for several years. This minimizes the upfront, immediate burden on people and households. For those who are living paycheck to paycheck, a 5% cut in income can be crippling. That might mean missing out on critical medical attention, postponing important repairs to a home, or going hungry. The psychological burden of being financially insecure is not something we can look past.
I've seen firsthand how recessions disproportionately affect vulnerable populations. Lower-income workers, small business owners, and those with unstable jobs are disproportionately affected. They don’t have the financial safety net to ride out the storm. They might, as a consequence, lose their jobs, witness businesses shuttering, and in some instances face homelessness. To flippantly shrug off these burdens as simply a short-term downturn in earnings is callous and disconnected.
The faith that a recession is an easily-winnable, one-size-fits-all-stimulus-package problem is mistaken too. The economy is a vastly complex, interconnected system, and recessions are almost never caused by one thing. Underestimating the challenge results in the wrong fixes and, in the end, more time spent in economic distress. Recessions are usually the result of when several bad things happen at the same time. Common triggers are asset bubbles, trade imbalances, and unexpected shocks such as pandemics.
Many assume recessions only affect specific industries or parts of the country. Yet the truth is that every economic crisis squeezes the entire economy, sending effects reverberating across sectors and industries. Slashed consumer spending affects an economy sector, from retailing and hospitality through producing and shipping. When jobs are lost in one industry it causes a drop in demand with snowballing effects in others, causing a vicious cycle of economic decline.
Despite my skepticism about the "opportunity" narrative, I recognize that businesses can take proactive steps to mitigate the negative impacts of a recession.
Strategic prioritization
Smart strategic prioritization should be the foundation of any multimodal alternative. Focusing on core competencies and high-value activities can help companies weather the storm. There are other ways to create greater efficiencies which yield not just the potential to spend less but the path to increased profitability.
My highest recommendation to companies—they need to make hard decisions. This means moving away from serving clients who often take a long time to pay or are difficult to work with. On the surface, this may feel like a hardline approach. It can resource up as allow company put focus more profitable and more reliable customers. Staying on a similar budget and tracking cash flow will be key to weathering tough economic times as well.
Things that don’t cost a dime
Non-cash incentives are often better at boosting morale and productivity. Things like work-from-home options or half-day Fridays might not seem like traditional perks, but for most employees, they’re just as appealing. Investing in employee training and development increases skills and productivity. This philosophy makes the company more robust in times of economic adversity.
Developing a standalone emergency fund equal to three to six months of living expenses is a good start. It should go without saying, but diversifying investments across a host of asset classes is another way to protect against risk. Paying off debt, particularly high-interest debt, creates more cash flow and lessens the burden of financial distress.
I’ve long been an advocate for developing a personal spending blueprint and tracking one’s personal consumption pattern. This enables people to see what they need and where they can reduce their expenses and save significant amounts of money. Making savings and investments automatic can further provide positive reinforcement through habit-forming behavior to meet those goals, despite the stresses of a difficult economic environment.
For example, there are certain industries that actually do well in a recession. From tech support to the baby product market, healthcare, online dating services and courier services, success abounds, but these are the exceptions that prove the rule. Firms in these industries would do well to be optimistic, but cautious and ready for disappointment for businesses is still advised.
Identifying consumer patterns during times of stand-still can uncover unexpected avenues. Leaders often say that finding those unmet needs, and creating innovative products or services to meet those unmet needs before competitors can give their business a leg up. We need to be far better at weighing risks and rewards, for example when it comes to investing in speculative new ventures during a recession.
Ultimately, the notion that a recession is an “opportunity” is a foolish and dangerous simplification. Though a select few people and companies will profit from the economic calamity, most Americans will experience severe economic distress. It is important to face recessions with caution, prudence, and a clear-eyed view of the hurdles we will be sure to face. We need to think about these things in a more holistic, nuanced, and empathetic way. Let’s end the debate about who’s in the most pain and start the real work of helping the people hurting the most. Now, the real work begins in terms of mitigating the damage done by the pandemic and fostering a more resilient, equitable economy for all.
