Smart companies prep for recession
A new look from three Bloomberg economists shows there is a 27 percent chance of a recession in the next 12 months based on economic indicators. And those indicators are actually looking better than they did early in the year when the model predicted a nearly 100 percent chance of a recession within 2019.
The game of trying to time a recession is largely a fool’s errand; few of the modern recessionary periods were precipitated by the overall health of the economy. Each of the previous three recessions was triggered largely by credit market calamities: the inflation crackdown in 1980, the savings and loan crisis in 1990 and the subprime loan implosion of 2007. Good luck spotting the next one until it’s too late.
One of the few kind things about recessions is they tend to hit everyone just as hard—the most resilient companies were impacted just as their peers were. But what did these companies do to come out stronger?
Harvard economists identified three key traits that set the most resilient companies apart: cutting costs early, aggressively reducing debt and maintaining the loyalty of key customers.
The research showed that by the first quarter of 2008, resilient companies had already cut 1 percent from operating costs, not an easy task as sales fell and fixed costs continued. While difficult, this focus on costs meant earnings advantages for seven out of eight quarters of the Great Recession.
As for debt, by the time the recession was in full effect, resilient companies had reduced debt by $1 for every dollar on their balance sheets. Less-resistant peers levered up, adding more than $3 for every dollar on their balance sheet, adding debt service in a time of freefalling sales and fixed costs.
Loyalty was also crucial, especially among key consumers. Harvard researchers pointed to Hyundai’s Assurance Program, where customers who lost jobs could return their car, as a successful program. Less-resilient peers reeked of desperation for revenue, applying deep discounts and marketing haphazardly—sound familiar?
When the recession was in full effect, these key traits helped resilient companies grow earnings by 10 percent while industry peers lost nearly 15 percent. The resilient gained momentum through the recession, and came out well ahead of the pack.