Talk of a recession in 2023 already has financial experts buzzing with predictions. Federal Reserve officials recently agreed that fed interest rate hikes need to slow as the U.S. economy shows signs of weakening. Despite their current & varied professional opinions, higher interest rates have been their primary tool for cooling off inflation.
Are we headed into a recession? Top economist and former chair of President Barack Obama’s Global Development Council Mohamed El-Erian says “The world isn’t just teetering on the brink of another recession, it is in the midst of a profound economic and financial shift.” For consumers and businesses, the tradeoff of lowered inflation due to recession likely feels ironic. However, recessions aren’t entirely uncommon: the United States experienced 12 during the 20th century. Businesses must prepare for these storms to weather them. Read on for seven things to remember going into Recession 2023.
1. What a recession is
A recession is a significant, widespread, and prolonged downturn in economic activity. Economists follow a common rule of thumb–two consecutive quarters of negative gross domestic product (GDP) growth indicates a recession.
Recessions typically lead to drops in economic output and investments, declining profits for businesses, and a rise in unemployment. The opposite of recession is expansion, the normal state of our economy. Expansion indicates economic booms and periods of prosperity that are better than expected.
When faced with a recession, the central bank (such as the U.S. Federal Reserve Bank) will drop interest rates to support the economy. The government budget deficit widens as tax revenues decrease; spending on unemployment insurance and other social programs increases.
2. Whether we are currently in one
Are we in a recession? Not quite yet, but experts predict it highly unlikely that we will manage to avoid one. A recession seems to be on the horizon, beginning in late 2023 or early 2024: “Predictions of recession timing are much more difficult than the eventual arrival of recession, so this forecast should be taken with a grain of salt.”
There was much debate about the economy and possible recession in 2022: politicians, economists, and market professionals could not agree if we experienced a recession over the summer. The argument came down to how the word “recession” was defined.
3. What recessions mean for businesses
What does a recession mean for me and my business? Both large & small businesses are impacted by a decline in sales and profits when a recession hits. Small businesses are especially vulnerable due to a lack of financial cushion, market power, and industry leverage. Recessions can often limit credit access, slow collections, and instigate business bankruptcies. The government has intended to support businesses–like with the PPP during the coronavirus crisis–with varied success.
Your business may find it challenging to generate the usual sales volume & profit. Businesses are less likely to invest in new products, capital spending, marketing, and research. They are more likely to cut overhead costs, identify employee redundancies, and lay off staff. Avoid rashly cutting prices to attract more sales: to thrive despite a sour economy and a challenging hiring climate requires a comprehensive strategy.
4. How long a recession lasts
How long will the recession last? It’s hard to say. Recessions can last for as little as a few months, but the economy can take years to recover to its former peak. Economists typically look to data to measure recession length: the time between the prior expansion peak to the downturn’s trough. The National Bureau of Economic Research tracks average recession length in the U.S. According to their data, from 1945 to 2009, the average recession lasted 11 months. This is an improvement over earlier eras; from 1854 to 1919, recessions lasted 21.6 months on average.
5. Businesses can prepare by practicing cost discipline
Looking for ways to cut costs and generate savings are natural first responses to an impending recession. Demonstrate shared responsibility in protecting the bottom line by engaging employees from all levels: leadership, department heads, and hourly employees all hold valuable insights. Consider bringing in temporary staff as your hiring team decides on which personnel gaps to fill in the new year.
6. Businesses can prepare by expanding their customer base
Recessions impact different industries and sectors uniquely. For example, recent tech layoffs indicate the beginning of a white-collar recession. Expanding your business networks will allow your business to diversify the range of customers you serve. Your team will be better insulated against adverse effects that hit one industry or sector harder than others.
7. Businesses can prepare by maintaining their front lines
In times of economic turbulence, a happy front-line team is critical to business success. Prioritize taking good care of the individuals who interface with your customers daily. Hiring seasonal employees ensures that your core team can take time off and avoid burnout at your busiest time of year.
Although a recession seems inevitable at this point, there is ample time to prepare. Businesses that intentionally think about their 2023 strategy for a recession have a much better chance of passing through this storm with success.
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About the Author: Meghna Jaradi is a freelance writer and events manager with experience working for the Seattle Times, Kitchen Arts & Letters, Book Larder, Peddler Brewing Company, and more. You can contact her on LinkedIn.