How to Weather the Projected Economic Downturn
Business owners and households can take action now to deflect financial damage
It seems every time you turn on the news someone is talking about the “R” word.
While most agree an economic slowdown is possible in the near future, not all talking heads are calling it a recession.
The very definition of a recession is a point of contention. According to the generally accepted view, it occurs during a “period of general economic decline, defined usually as a contraction in the GDP for six months (two consecutive quarters) or longer. A recession is marked by high unemployment, stagnant wages and fall in retail sales.”
The National Bureau of Economic Research, a privately owned nonprofit, uses more frequently reported monthly data to make its decision regarding recessions, so quarterly declines in GDP do not always align with the decision to declare a recession.
However it is defined, it seems the folks who keep track of leading indicators believe there is some sort of economic hiccup in our immediate future.
According to Reuters, the economy recently experienced an “inverted yield curve.” In layman’s terms, investors are taking fewer risks on long-term Treasury bonds and buying more short-term options, which is a key indication that the economy is about to take a nosedive. In fact, the August inversion was the most significant since 2007.
While that doesn’t necessarily mean the economy will slip into a recession, Reuters reports that the U.S. curve has inverted before each recession in the past 50 years. Only one time did the curve give a false indication.
Another sign economists use is the U.S. Department of Labor’s monthly jobs report. While the report itself might not imply a recession is looming, data concerning the number of hours worked is an important aspect of the report. If business owners are worried about sluggish sales, the first thing they cut is the number of hours their employees work. That indicator is currently at its lowest level in two years.
Owners of small business should take action if they believe an economic slowdown or full-blown recession is on the horizon. According to The Balance Small Business, inventory and accounts receivable influence cash flow. Selling inventory and collecting receivables quickly can boost cash flow.
Other suggested safeguards from The Balance are reviewing inventory management and focusing on core competencies – the best-selling items or services offered. Companies can also poach customers from competitors by providing better customer service.
Another mistake businesses make during a downturn is to cut the marketing budget. “A Big mistake,” say the experts. Consumers are also hurting in a recession and are looking to adjust their buying decisions. Smart marketing will get a company’s name out there and help people find your products and services. In fact, The Balance suggests stepping up marketing efforts to draw the attention of consumers.
Families need to put safeguards in place as well, according to Market Watch. Among them are:
- Reinforce your savings by establishing an emergency fund (if you don’t already have one). The ideal emergency fund should be enough to cover six months of a downturn, but Market Watch recommends $500 will be a good start.
- Shop the different rates banks and credit unions offer and determine if you can fare better by moving your accounts to a bank that has a higher yield. It might not mean much more money, but in hard times any advantage is good.
- Pay down debt as much as possible. Thomas Nitzsche, a credit educator at credit counseling agency Money Management International, told Market Watch that any balances you can pay off now – while the economy is strong – won’t be a budgetary factor in a recession, when you might have less money to address debt.
- Keep your resume up to date. No matter how much you love your job or feel secure in it, consider that Michigan’s unemployment rate just 10 years ago was more than 13%. Post your resume at the major business and jobs sites and ask co-workers and supervisors to write you recommendations. If possible, obtain certification or additional training to improve your employability.
- Get your investments in place. Market Watch advises those nearing retirement put more of their portfolio in fixed-income investments, dividend-paying stocks or cash. Set a meeting with a financial planner to get the best advice on what you should be doing to weather the downturn.