Good things don’t last forever, as you’ve likely heard when experts have talked about stock market gains. Shares have taken a big hit of late, certainly. But more than that, there are indications we’re probably in for a recession in the next year or two.
One sign is the current flirtation with yield curve inversion. That’s when short-term Treasury bonds have higher interest rates than long term—typically a comparison of 90-day and 10-year notes. We’re still in near-but-not-really-there territory, at least as of December 31, 2018.
But it shows a weakening. Then there is a recent survey of CFOs which showed that a big majority expected a recession to start by 2020 at the latest.
None of this is definitive by any means, but there is the chance that after a long period of growth, we could see a downturn. And that possibility should inform your work in the coming year. Here are some things to keep in mind.
Nothing Is Certain Yet
The only way to know when a recession happens is after it is past. You can’t count on timing coverage to coincide any more than you can time the stock market. There’s also no way to know how deep a recession might go.
Instead of pegging coverage to certainty, It is necessary to take a risk management approach and consider the probabilities of events rather than treating them as something definite. Part of this will involve close observation of economic conditions as well as developments in industries and their leading companies.
There are multiple ways that a declining economy can have an impact on corporations. One is obviously sales. Much of business depends on consumers and companies investing money, whether in cars, appliances, machinery and equipment, real estate, or other areas. Although there are areas that might be relatively immune—people continue to need groceries, for example—or even counter-cyclical, such as bankruptcy attorneys seeing an increase in work.
A slowdown can affect vendors and supply chains as well, with mixed results, Fuel and energy prices can drop because of slower demand, reducing transportation costs. Vendors might downsize staff, putting pressure on their ability to produce and deliver goods with the same timeliness or quantity as before.
Companies with sufficient capital often undertake acquisitions when times are slow to bolster their own growth and take advantage of lower prices. And those corporations that had loaded up on cheaper debt may suddenly find themselves in difficult financial positions as loans come due and rolling them over, if possible, to extend room to operate is far more expensive.
In addition, look for changes in top and middle management. Companies may find that someone who was adequate or even good under one set of economic conditions might not be as effective in another. Higher turnover could indicate a CEO trying to clean house or lay blame, or executives who have lost confidence in a company and want to preserve their careers.