There is a not-so-fun phrase you hear a lot when pundits talk about the state of the current economy. “We’re probably in a recession right now.”
It doesn’t inspire a lot of confidence in the pundits’ understanding of the facts on the ground, does it?
Having teed myself up, I guess I should say we’re probably in a recession right now, but this one is starting off unevenly, which gives businesses a chance to think through some of the things they want to put in place before the worst of it hits.
What Exactly is a Recession?
Let’s begin by clarifying what exactly a recession is and who gets to say one is happening. Here are a few of the dictionary definitions easily available online for the business blogger on the go:
Merriam-Webster: “A period of reduced economic activity.”
Collins: “A recession is a period when the economy of a country is doing badly, for example because industry is producing less and more people are becoming unemployed.”
Cambridge Dictionary: “A period when the economy of a country is not successful and conditions for business are bad.”
Dictionary.com: “[Relating to] economics, a period of an economic contraction, sometimes limited in scope or duration.”
You get the idea, but did you notice all of them are pretty unspecific? ‘Reduced,’ ‘doing badly,’ ‘not successful,’ and ‘economic contraction’ can cover a wide range of unpleasantness. Who really gets to say, “This is a recession?”
Well, in the United States —whose recessions often set the tone for global business conditions— that dubious honor falls to the National Bureau of Economic Research, a private nonprofit research organization, “Committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.” Specifically, the NBER’s Business Cycling Data Committee makes the call based on a loose criteria defined as, “A significant decline in economic activity that is spread across the economy and that lasts more than a few months” with a good guideline being two back-to-back quarters of reduced Gross Domestic Product marking the starting point, and the average American recession lasting about 17 months.
An interesting wrinkle in the committee’s work? Calling something a recession can actually increase the severity of a recession, as businesses and consumers change their behaviors once that particular term hits the zeitgeist, and so the group is careful not to rush to put a label on things. The NBER can wait anywhere from four to 21 months before calling a recession a recession.
As of my writing this column we have had two negative quarters of GDP growth (a recession!) followed by a quarter of positive growth (not a recession?), with unemployment remaining low (that doesn’t often happen in a recession), and average employee wages rising (that also is not really a thing that happens in a recession). Meanwhile, the US inflation rate has hovered between 7-9% throughout 2022 (a frequent fellow traveler of recession), and interest rates (which are almost always tied to inflation rates in an attempt to curb them) continue to rise.
So what is going on? Well, people who do this for a living will probably say a year from now —unless things get much worse or much better in the meantime— that, “We’re probably in a (mild) recession right now.”
What Does That Mean for Businesses?
Now that we’ve gotten the definitions out of the way and also have a little context for why we’re probably already in a recession but not calling it one yet, why don’t we start getting into that changing of behaviors I mentioned earlier?
In the broadest possible terms, a business in a recession should expect to sell less of what it does, which means it will make less money. There are companies and whole industries who respond to that stimuli by cutting all expenses to the bone and battening down the hatches to survive on starvation rations until times of prosperity return. Those businesses already know what they are going to do and need very little advice from a blogger in the peanut gallery exploring a range of options and ideas. I will also say, from a personal and professional opinion, those companies inspire little love and loyalty from the workforces they let go in tough times, and as someone who talks about the war for talent in one way or another in almost every business conversation, I would go so far as to say a strategy of slashing operating costs until the balance sheet stops bleeding red ink from quarter to quarter without thinking of the long-term damage you do to a company’s long-term health, wealth, and growth is by definition short-sighted.
There are better ways to weather a storm.
For the rest of this week’s column, let’s talk about what a business seeing a recession brewing should be thinking about and doing right now to come out the far side stronger. To the senior leaders who read this, let’s discuss your people, your product, your processes, and your plans as they are impacted by a recession —if there is a recession, which there almost certainly probably is or will be very soon.
Having just chastised entire unnamed industries for sweeping layoffs when faced with recession, we should quietly acknowledge headcount does make up most businesses’ number one operating cost. The temptation to scale back is very real, and in many cases perfectly understandable. Publicly traded companies whose successes and failures are measured three months at a time —or even privately owned companies whose owners expect the best bottom line every quarter— are incentivized to reduce costs even when times are good, so how much stronger is the pull to cut overhead by letting people go when revenues are down?
To that I say there are other ways to manage headcount without taking a metaphorical scythe to your workforce. Those are the people you chose when times were good to build your company. You put time and energy into training them. You work hard to be the kind of company that attracts top talent, and you build your competitive advantage on what top performers bring to your organization. Do you really want to start treating your people as numbers when times get tough, knowing the people you get rid of may very well be the resource you need to come through the far side better and stronger than you were before? And let’s also remember the people you let go today don’t just disappear into the ether. Sooner or later many of them will end up working for your competitors, bringing their talents and understanding of your business to their new employers.
By all means, have a hiring freeze. By all means, encourage middle management to come up with innovative solutions to get the existing team to do more high-value tasks with the same or less resources than they had before. There are also opportunities to retrain and upskill employees working in departments in need of modernization, and where in boom times these people might see their new capabilities as justification for a raise, in a recession you are earning their loyalty and dedication for investing in them and offering them job security when they knew there was another option that would have seen them out of work. I wrote an article last month about how investing in your people during an unproductive time like the holidays can pay disproportionate dividends throughout the year. How much more true would that be to offer your workforce certainty and the promise of a brighter future in their working lives as they navigate a time of personal and professional uncertainty? A recession can be an enormous opportunity for talent retention and development!
I suppose we cannot talk about people in a recession without also talking about automation, which is another topic I have written about in the past. In that article I repeated something that really clicked with me: “Technology doesn’t replace people. It replaces tasks.”
There will be things to do during a recession that can be automated. Investing in new hardware and software during a recession when those assets may well be on sale by service and solution providers looking to hit their own sales targets in tough times will offer an enormous return on investment long after the economic crunch ends. There is an opportunity to reduce headcount organically as people leave the automatable jobs, either moving on to better jobs within the company or other opportunities elsewhere. Putting resources into ongoing efforts to automate work during a recession is a smart thing to do with limited resources, and a time of reduced demand is also a good time to dedicate otherwise busy people to special assignments like pilot projects and rollouts of new tools, which again broadens out those employees’ skillsets for a future that will include new technology-driven capabilities.
Without getting into the specifics of what your company does, we can call the output a product. In a recession, demand for most products is reduced, which means revenue goes down and the metrics by which companies are judged to be doing well or poorly points in the negative direction.
Let’s remember the old adage that where there is crisis, there is opportunity.
Whatever you make or do, there is never a better time to fix it, to tinker with it, to improve it, than when demand is reduced. You have experts on your product with free time on their hands. Get them innovating! Is there a way to make and do what they make and do faster? Greener? Better? With less capital or human resources or dedicated hardware? Are there opportunities to repackage and rebrand it to better meet the changing needs of consumers?
A recession offers an opportunity to kick the tires and reevaluate things without slowing down or pulling top performers from where they are needed most. Things already slowed down. What are you going to do with the free time, and how is what you make or do going to be better on the far side of the recession when things ramp up again? Faced with a few months of reduced demand for your product, how can you invest that time to build increased demand in the future?
The easy thing to do in a recession is sit on your hands waiting for happy days to come again. The better thing is to view the slow down as a chance you so rarely get to rethink and retool the thing you do to make it better than it ever was before.
As true as that is of your product, it is even truer of your processes, and here I will finally embrace one of the classic responses to a recession that businesses have observed since the dawn of capitalism: Let’s talk about reducing costs!
Now, hold on, having just written more than 1700 words already on not cutting things to the bone during a recession, I am not changing my tune quite that dramatically. I am instead referring to one of my favorite topics that I admit has fallen a little by the wayside in the last few years: Lean.
Do more with less. Eliminate waste. Optimize your processes. Seek Operational Excellence. Have daily kaizens with your team. Make small but frequent incremental changes that add up to big things over time. Seek a culture of Continuous Improvement. Oh, I could sing this song all day long if anyone would care to hear it.
I love talking about Lean, but it has not been a big part of the popular business mood during a time of global disruption. So much of Lean is about fine-tuning the day-to-day, and so much of the last few years has involved too much turmoil to have that normalcy that can be made a little bit better all the time. Well, a recession is an excellent opportunity to encourage the lean thinkers among your workforce and top performers to break out their best practices and get to work.
Lean does not cost money. It saves money, and good CI programs invest that savings into more and more initiatives that continue to save money while increasing productivity and quality and employee satisfaction. Lean drives culture. Lean drives innovation. Lean can come to define the success of companies.
If we really are probably in a (mild) recession, wouldn’t one of the best things to come from that be a reinvigoration of lean thinking after a long pandemic slumber? Take a look at your processes. Go on a gemba walk. There are so many things that have probably crept into how you do business over the course of two years of crisis management, improvisation on the fly, and the transition to a new normal of work, that the opportunities to reduce costs while improving outcomes is almost certainly inexhaustible before the next economic boom comes around. Wouldn’t it be wonderful if the Lean habits developed during hard times continue on and empower your business in the good times ahead?
Having spoken of your people, your product, and your processes, the thing that should connect them all is your plan. What does your business really want to do in the next couple of years? If we are coming into a recession, let’s assume dramatic sales increases are not going to be a readily achievable goal. What else do you want to do? Let’s go beyond a couple of years. Where does your company want to be a decade from now? What are you doing to get there?
It’s okay to admit a lot of things have changed since 2019, and maybe some of the long-term objectives have been shaken loose or grown fuzzy as senior leadership fought fires and made sweeping transformations of how the business operates. Maybe a recession really is an opportunity for everyone to take a breath and get refocused on victories that aren’t just ‘getting back to normal’ or ‘recovering what we lost.’ The future should not be about the past, and if winning is hitting a pre-pandemic target, that was not much of an accomplishment, was it?
Maybe companies can take the next year or two to reimagine their futures and put pieces in place — people, products, and processes— to achieve those dreams. Set yourself a stretch goal. Scare yourself. You are going to have some time to figure it out, but you can’t solve for a lack of ambition.
You want to rethink your footprint to mitigate global supply chain disruption? Good. A time of reduced consumer demand is probably as good a time as any to figure out new local and regional networks.
You want to be a company that people associate with Sustainability? Great! Get your Sustainability people and your Lean thinkers together and watch them reduce your environmental impact while reducing costs. Tell them how far you want them to go, and then watch them go there.
You want to break down silos and get different departments sharing information seamlessly? Has there ever been a better time to get different teams talking to one another and collaborating on new communication tools and methodology than when things aren’t that busy?
I cannot list off all the things your company might choose to do during a recession, but I can point out getting into a crouch and hoping the storm blows over is a tragic waste of an opportunity. When times are good, of course your focus should be on meeting demand. When your customers are asking less of you, how is that not the ideal time to ask more of yourself, of your people, of your products, of your processes, and, yes, of your plans for the future.
I don’t want there to be a recession. Of course not. I do acknowledge it’s part of life, and no part of life should be about enduring stagnation until better days are upon us. There is an opportunity here to be better even when we feel at our worst. Dig deep, think about what you want to do to prepare for the better days ahead, and then get into it. Good luck!
Head of Content & Research
Geoff joined the industry events business as a conference producer in 2010 after four years working in print media. He has researched, planned, organized, run, and contributed to more than a hundred events across North America and Europe for senior leaders, with special emphasis on the energy, mining, manufacturing, maintenance, supply chain, human resources, pharmaceutical, food and beverage, finance, and sustainability sectors. As part of his role as Head of Content & Research, Geoff hosts Executive Platforms’ bluEPrint Podcast series as well as a weekly blog focusing on issues relevant to Executive Platforms’ network of business leaders.
Geoff is the author of five works of historical fiction: Inca, Zulu, Beginning, Middle, and End. The New York Times and National Public Radio have interviewed him about his writing, and he wrote and narrated an animated short for Vice Media that appeared on HBO. He has a BA Honours with High Distinction from the University of Toronto specializing in Journalism with a Double Minor in History and Classical Studies, as well as Diploma in Journalism from Centennial College.