MainStreet Macro: Nela’s Recession Playbook

The biggest economic debate of 2023 is whether the U.S. is heading toward a recession. And the reason it’s being debated is because the data shows evidence for both sides.

In the no-recession camp, the economy grew by 2.9 percent last quarter, besting analysts estimates, and inflation slowed for the second straight month in December. And while we’ve seen big headlines on corporate layoffs, these job losses aren’t yet reflected in the data. Jobless claims for the first three weeks of January were near record lows.

Not everything is rosy, of course. While the overall GDP picture was solid, there were cracks beneath the surface. Real consumption, the largest component of GDP, fell in December. Personal incomes grew at the slowest rate in eight months. Weak spending and income growth could tilt the economy into a downturn this year.

In sum, the outlook for recession is as easy to call as a coin toss.

So instead of giving you another prediction on the likelihood of a U.S. downturn, here’s something more useful: My recession playbook – advice business owners can use regardless of whether we see a recession in 2023.

Know what you’re up against.

Recessions are painful events that share specific characteristics. Prices can stagnate as consumers cut back on spending. Incomes drop. Business growth slows or vanishes altogether. Eventually, the downturn is punctuated by widespread job loss.

Businesses can prepare for lean times with advance plans to address each of these eventualities.

The silver lining on this dark cloud is that recessions don’t last forever. The economy eventually hits bottom and then starts growing again. 

Study your opponent.

Despite their common characteristics, every recession is unique.  The last three downturns all had different triggers. 

In 2001, the dot-com stock market crash was triggered by weakness in online business. Fears about the year 2000 problem – Y2K – and the 9/11 terrorist attacks also fed the economic downturn that year.

The 2007-2009 recession was fueled by subprime mortgage lending and the accompanying toxic spread of financial derivatives that crippled global banks – and many economies.

And we all remember the latest downturn. The pandemic recession of 2020 was sudden, steep, and mercifully brief.

What could trigger a recession this year? Odds are that it won’t be any of these events. As you prepare for the possibility of a downturn, keep in mind that inflation and higher interest rates will most likely be the culprits.

Invest for success.

ADP CEO Maria Black, talking to analysts on an earnings call last week, said “the key for any business owner is to make smart decisions during a downturn so you can execute quickly when it’s over.” That advice draws on Black’s decades of experience and expertise helping navigate clients through the three recessions.

Businesses of all sizes that continue to invest in technology, capital, and people during downturns are better positioned to take advantage of their markets when the economy starts growing again.

My Take

This week, new job data will provide more fodder for the debate on the likelihood of a downturn. At stake in the near term is Federal Reserve policy making.

When they meet this week, Fed governors likely will raise interest rates again as they continue their assault on still-too-high inflation. But as they do so, they’ll make it more difficult to borrow and invest in an economy that looks increasingly unsettled. By acting against inflation, the central bank could increase the odds of a downturn. The Fed is in a tough spot, and its race against inflation and recession is still too close to call. Businesses that prepare for the worst will weather it the best.