A recession is a period of severe economic decline where all kinds of industries, trades, and businesses either suffer heavily or come to a temporary halt. Countries suffering from economic recession often see a fall in their GDP in both quarters.
The minimum period of economic decline that is required for the period to be called a recession is six months. There is a fall in employment, manufacturing, sales, and market size. The most common notion about a recession is the fall of GDP for two consecutive quarters. In reality, a recession often begins even before the gross domestic reports are revealed, making them so dangerous.
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Signs of economic recession
The National Bureau of Economic Research notes four factors based on which it decides a recession. This data is revealed monthly, and a decline in these factors contributes to the decline in GDP. A recession usually begins when there is a slowing of the economic growth, but there is still an overall net positive. Often, the quarter’s cycle between negative and positive growths, which also point towards an impending economic crisis.
One of the clearest signs of economic recession is a decline in the manufacturing sector. The manufacturing industry has certain characteristics that make it a critical indicator. The manufacturing sector receives orders months in advance. This data of all the orders known as the durable goods order report works as a prediction report. Since these orders are made in advance, a decline in this report indicates a decline in demand and therefore jobs in the manufacturing sector. This causes the manufacturing industries to lay-off their employees in mass. This decline in the manufacturing sector and loss of jobs begins to affect other sectors. The slowing down of growth is effected by a fall in the consumer demand. As sales begin to drop, retail stores, businesses, and companies stop expanding or hiring. Once this stage has been reached, it is clear that recession is underway. A recession doesn’t only affects one country but can have a chain reaction affecting multiple countries. The Great Recession that hit the United States had rippling effects on many developing and developed countries.
Aside from these categories, economists often look for two sets of data known as leading points and lagging points for predicting a recession. The leading indicators are usually noticed before the recession is officially declared. One of the strongest leading indicators is the stock market. A steady decline in broad stocks is often a clear prediction of an upcoming recession. The lagging indicators of a recession include unemployment rate. During a recession, unemployment rates can go as high as 5 to 10%.
Probably the only silver lining associated with a recession is that it combats inflation. Inflation is the excessive rise in the prices of goods. The Federal Reserve in the United States must always balance between the two in order to prevent both slowing down of the economy without triggering a recession. This balance is usually maintained through fiscal policy. The federal budget is decided upon, and the economy is stimulated through job creation, lowering of taxes, and social programs.
US Recession in 2019
While the US president Donald Trump’s tax cuts will pull the US economy through 2018 and 2019, some of his other policies might trigger a recession by the end of 2019 and in 2020. As mentioned above, a decline in the growth rate are signs of recession. The quarterly outlook that is released by the National Association of Business Economists is usually reported by a panel of 45 economists. They reported an increase in the gross domestic product by 2.8% by this year. This is a decline from their previous assessment of 2.9%. The panel’s initial forecast for 2019 was at 2.7%.
The National Association for Business Economists predicts a recession that cut-off the projected growth. More than two-thirds of the economists predict an upcoming recession by 2020 and more than 18% believe that the decline will be visible from the end of 2019.
The biggest reason for this upcoming recession is being attributed to Donald Trump’s recent trade policies. About three-fourths of the panelists predict that there will be a trade war due to the tariffs imposed on the steel and aluminum trade imports from countries like Canada, Mexico, the European Union and separate tariffs imposed on Chinese imports. The retaliation of these tariffs can trigger a recession in 2020.
Preparing your business for the impending recession
Businesses suffer the worst consequences during economic recessions. The steady decline in the consumers’ confidence and the decreasing sales often leads to bankruptcy. Small and medium businesses are particularly vulnerable to the effects of a recession. Since the signs of another approaching recession are so clear, there are steps that businesses can take to safeguard their interests and protect their operations. Mentioned below are ten steps that all businesses can take in order to protect themselves from the coming economic crisis.
- Keep a steady flow of work- This is the most obvious step that businesses should take. The surest consequence of recession is a decline in demand and therefore sales. Businesses must not lose focus from expanding their client list or customer list. By maintaining vigilance and constantly improving the client list, businesses can ensure activity during the times of economic recession. Companies must work on their seller-doer list through constant training and process improvement.
- Improve the core competencies- Businesses, in order to remain competitive in the current market, often focus on diversification and pivoting. Thoughtless addition of products and services is not a stable growth model. Diversification takes money and resources away from core business competencies. During a recession, diversification efforts have negative outcomes, and it’s the core strength that keeps a business going.
- Focus on talent retention- While layoffs are a common strategy during a recession, losing talent will do more harm than good during these periods. The recession is a time when businesses need to go into overdrive mode. They need to deliver greater output with severe limitations on resources and operations. Losing key talents at such critical points of time can be quite detrimental to the company.
- Implement automation strategies- In order to conserve the costs of layoffs and the trouble of going through the manpower, companies should focus on implementing automated technologies. Most of the routine processes such as repetitive manufacturing processes, database and network management, data analysis, management of software portals and other routine activities should be done by automated systems. These systems do not suffer from problems associated with the recession and need to be laid-off. They can be simply recycled or operated in limited shifts for optimization.
- Have multiple strategies- In the business world, there is no beaten path. One formula does not work for all types of market conditions. Companies and economists should meet annually and discuss the market conditions and the predictive signs of various economic crises. The financial team within companies must generate monthly reports which track the economy. Based on the patterns, different strategies must be kept ready to brace various kinds of recession.
- Always operate based on a recession model- Businesses often recognize their various shortcomings and process inefficiencies once the recession has already hit them. This causes unmitigated damage. All businesses must strive to maintain strict operational protocols and quality parameters. There must be continuous incremental development. Ideally, businesses should strive to operate as if the recession is already upon them. Only through such proper processes can businesses survive when they are hit with the recession.
- Establish financial protocols- This is probably one of the most important steps that businesses can take to safeguard their operations. Accountability is of prime importance in maintaining the quality of operations. Without being able to hold the respective project managers and executives accountable, companies cannot identify the impacts of the recession and the potential solutions. Protocols such as performance standards, routine meetings, process parameters, and the tracking of metrics and progress must be established.
- Protect the cash flow- The flow of cash is the single most important metric in any business. Keeping a healthy cash flow can maintain the business in difficult times. Businesses should actively create plans to decide and maintain their cash flow during times of recession. Such planning will keep the business running, and all the expenses of the operations and overheads will be covered.
- Improve Inventory Management Practices- Inventory management is important in combating a recession. As mentioned previously, recession causes a significant drop in the number of orders and consumer demand. This means that the inventory sitting in the warehouses will end-up as blocked capital. Businesses must employ lean and just-in-time practices to maintain their inventories better.
- Keep marketing- Just because the recession has arrived doesn’t mean businesses should stop focusing on their consumers. By actively marketing themselves even during a recession, they can maintain their customer confidence and continue to make sales.
‘Recession’ is something that’s not in your hands. All you can do is be prepared for it at all times. If it takes you by surprise, then it would be almost impossible to overcome it. However, if you are prepared