Your Guide to the Next Economic Recession (It’s Coming)
At the start of 2018, whispers of a recession began wafting through the internet. Google searches for the term “next recession” always trended comfortably low, but surged to an all-time high in June of this year. The graph above charts the term’s popularity on Google over the last 14 years, and the current spike is nothing if not ominous.
A wave of gloomy “next recession forecasts” has since surfaced, with headlines like: Why Our Next Recession Will Be Severe; The Next Recession Is Really Gonna Suck; and Why The Next Recession Is Set To Reshape Our Economy. We’ve enjoyed 11 years of hearty economic expansion, but twilight is settling over that era.
How do we know a recession is coming?
There are several classic indicators that signal when a recession is near. These include:
- Price of assets – The price of stocks, homes, and other assets have a tendency to skyrocket in advance of a recession. Before the stock market crash of 1929 and the 1999 dot-com bubble, stock and home prices were at “too good to be true” levels—which forebode catastrophe. To better understand where asset prices sit, we have something called the “price-to-earnings ratio,” which tells us what the current price of assets looks like in relation to people’s income. The ratio was 44 just before the dot-com bubble burst in ‘99. It sat at 27 in 2007 before the Great Recession. Today, it sits at 31. If the price-to-earnings ratio is anything to go by, it sure smells like recession.
- Price of oil – A spike in oil prices has preceded every US recession since 1939. Brent crude oil serves as a major benchmark for worldwide oil prices, and the price of brent crude shot up 50% in the last year. (It’s worth noting that those prices have been much higher at other points during our 11-year growth period, and the economy kept its balance regardless.) The current upward trend in brent crude prices could suggest we’re headed toward recession, but this is not a conclusive indicator.
- The inverted yield curve – Since we mere mortals aren’t as familiar with stockbroker jargon, we’ll break it down together. “The yield curve” has to do with government bonds. There are two types of government bonds: 10-years and 2-years. A “bond yield” is the amount of money that a bond pays to the person who originally purchased it. When you subtract the amount of money a 2-year bond yields from the amount of money that a 10-year bond yields, you get the “yield curve.” A 10-year bond is supposed to yield more money than a 2-year bond. The yield curve is considered “inverted” when a 2-year bond yields more money than a 10-year bond. Here’s the scary thing: An inverted yield curve has always reliably signaled an impending recession—about a year or two in advance. The takeaway: when the yield curve becomes inverted, you can almost guarantee yourself a recession within the next year or two. Right now, the yield curve is not inverted. But it’s about to be:
But if these are the symptoms and indicators of impending recession—
What will cause the next recession?
In a word: inflation.
In many words: Many cite monetary policy error by the Federal Reserve as a potential cause of the next recession. During fevered economic expansion, the Fed must do their part to keep the economy from overheating, tweaking interest rates and tightening credit conditions, among other things. This is an extremely delicate process. If they overshoot or undershoot their figures, the smallest misstep could plunge the economy into recession. At present, they are tinkering with those interest rates, and we’re tensing up in anticipation of the results.
If that sounds a bit vague, it’s meant to. The root cause of recession is almost always shrouded in uncertainty until pinpointed in hindsight. Efforts to untangle and demystify the factors in advance will prove difficult, even for seasoned economists. For the time being, popular opinion says that the issue will be rooted in the Fed’s monetary policy. Historically, they’ve been known to raise interest rates, not see the desired effect in the economy, and raise them even more.
Economist Milton Friedman called this the “fool in the shower” effect. A man in the shower turns on the hot water, but still finds it too cold. Rather than waiting for it to warm on its current setting, he keeps turning up the heat, until he scalds himself. Above all: the next recession will most likely be caused by the Federal Reserve raising interest rates to curb inflation.
Will the housing market crash in the next recession?
Thankfully, popular opinion says no. A housing market crash is not slated to be the central protagonist of the next recession. The reckless lending practices that gave way to the housing crash in 2008 have been amended and are no longer the norm. Nor is a full-blown stock market crash predicted. Some experts, such as Ryan Sweet of Moody’s Analytics, have encouragingly predicted that the coming recession may be a “garden-variety downtown,” not presenting in extremes one way or another, but it will still be pervasively felt.
What will the next recession be like?
Recessions are, by nature, a period of economic slow-down. Risky, poorly-conceived investment strategies and credit agreements accumulate, then cave in on themselves. This sends a ripple effect through the economy, exerting sudden financial pressure on businesses and individuals who were encumbered in those risky strategies. The added financial pressure may force companies to lay off non-essential employees. With less people gainfully employed, collective buying power diminishes. With less people buying products and services, businesses suffer, which may force them to let go of more employees—and so the cycle continues.
Currently, unemployment benefits are more scarce and less generous. Some predict that American workers, particularly the younger set, who are laid off during the next recession, will be forced to turn to the “gig economy,” taking on lower-paying, app-based jobs like an Uber driver or delivery person—because the economy will always be rife with such positions. The inherent issue is that these low-paying jobs have next to no room for an employee’s upward mobility and barely cover the cost of living.
Technology could replace many jobs
The neatest feature of this recession is the fact that it will coincide with, if not stimulate, a period of robust technological expansion. Many expect an intensified period of adoption for new technologies. Employees may not just be laid off from their jobs, but find that the job itself becomes obsolete.
With forceful advancement in the field of AI and robotics, we’re on track for a more “automated,” technologically-dependent economy—with potentially fewer low-skill-level jobs available. This begs the question of how such workers are going to get by. If fry cooks, janitors, and the like are replaced by machine, will everyone be forced to hone a unique skillset, or be left unemployed? The full realization of this futurist prophecy may not be germane to a recession due in the next two years, but the recession itself may be the flint that ignites it.
Perhaps the most pressing question:
When is the next recession going to happen? How long will the next recession last?
Experts have pinpointed the first quarter of 2020 as the start of the next economic recession.
While no one has a crystal ball, this was the most popular prediction among a panel of 100 expert economists surveyed by Pulsenomics, who made their estimates in consideration of historic norms. The second most popular prediction was the fourth quarter of 2020. Additionally, 59% of private-sector economists surveyed by The Wall Street Journal predicted that a 2020 recession is in the cards.
But how long will the next recession be?
We have reason to believe the next recession will be longer than 18 months. President Obama offered up perhaps the most valuable piece of intel we have about its duration. He went on record saying that the next recession might be “more protracted” than its predecessor, meaning it would last longer than the 18-month recession we experienced in 2008.
How can I prepare my business for the next recession?
Failing to plan is planning to fail.
However, because the forecast for the next recession and its severity are nebulous, it is difficult to create an ultra precise plan of attack.
As a business owner, the best thing you can do is craft a bona fide Recession Contingency Plan, right now—one that covers all your bases. Think about what you’ll need to do over the next year to intently, financially, and strategically put yourself in a position to ably implement this plan. Then remain in that offensive position until the potential recession strikes. Few companies will do this, and that is why so many will flounder when it hits.
But what should a Recession Contingency Plan look like? You will naturally need to collaborate with your senior leadership to determine how to sustain the company if revenue gets tight and the lead funnel suddenly shrinks.
When creating your Recession Contingency Plan, consider the following moves:
- Increase your credit lines now, while the economy is still in good health
- Slow the pace of hiring, to minimize the necessity of layoffs. Think critically about what structural changes would allow you to accommodate the same volume of clientele with slightly less manpower. If feasible, you could discuss increasing your current employees’ workloads, but offset any discontent by raising pay. Salary bumps are objectively less expensive than continually committing to pay another entire salary. This gives way to leaner employee base. It also serves as an opportunity to critically assess whether you are actually underworking certain employees. If your plan is structurally sound and the workloads doable, it may pay off during a recession.
- Diversify your service offerings, in scope and in price. If fewer people are able to afford large pricy packages, creating new or adjacent sales channels may be a very smart move. This way, you can avoid dependence on the constant flow of just one type of lucrative deal, in case that flow suddenly halts.
- Enter into thoughtfully-planned alliances, acquisitions, and partnerships that allow you to cast a wider net in the leads you attract
- Reallocate funds used for business growth & development to enrich the customer experience. Pouring investment into the customer experience is a fail-proof strategy. It helps ensure you will hang onto your current lifeblood/customer base, indisputably your largest asset. Across the board, consumers seek:
- emotionally positive experiences
- palpable effort
- attention to detail
- product durability
- a sense of unbridled trust in their service provider
A focused effort to deliver on these things, especially in advance of a recession, is one of the single smartest moves you can make. You could even designate a dedicated team to manage a “hyper-enrichment” of customer experience. The investment you make today in your customers’ emotions, happiness, and sense of affirmation in working with you, will perhaps be the single most important action you take before the next recession.
- If all else fails, buy stock in AI and robotics-based companies. The time is now, folks!
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