Seeing around the corner

This last week the Fed raised its policy rate by .75%. This is the second time in as many months that the Fed has taken a three quarter jump. With inflation at 40 year highs the Fed is taking drastic steps to cool the economy down. It's a delicate balance to pull back on the throttle without stalling the engine. The Fed has rarely been able to find that middle path between an over-heated economy and recession. Indeed, this week's GDP numbers show that the US economy shrunk for a second straight quarter. Officially we're in a recession. This time around though not all the numbers point the same direction. Non-farm payroll actually rose by 372,000 in June and the unemployment rate remained steady at 3.6%, which is line with pre-covid numbers from February of 2019. Anecdotal evidence suggests we may see a different direction on these values once the July numbers come out but for now they're not showing as a leading indicator of contraction. This may be due to the historic worker shortage the US economy has found itself in during the pandemic recovery.

As scary as the possibility of recession is for most businesses and workers, what adds to the anxiety is uncertainty. What comes next? Will the economy remain in technical recession while continuing to maintain a stronger labor position or will it fall into a protracted downturn? Will a short bounce at the bottom be sufficient or will the Fed continue to apply pressure to reign in rampant inflation? No one knows. How can we see around the corner and be ready for whatever it is?

First, let's look at the traditional steps companies have taken in times past when they've faced a similar situation. Below are some of the actions that we typically see and frankly can see in the news everyday right now.

• Conserve capital by restricting its use to only essential projects
• Divest non-core assets
• Close underperforming business segments
• Reduce headcount
• Reduce spending on growth, innovation and research
• Eliminate non-essential expenses
• Reduce discretionary spending
• Tighten customer facing policies (i.e. payment terms, returns)

Here's the problem with that list. All of those actions are incredibly short-sighted. Some point to potential issues in managing a business during good times, like properly managing discretionary spending or regularly evaluating asset management. While others are so impactful that they're career decisions that a company will add to their legacy forever, like divesting assets and reducing headcount. They may be necessary if desperate times occur but more often than not what we see is a knee-jerk reaction to execute that whole list to prop up declining quarterly numbers.

But what if there's a different way? A different response that let's you see around the corner and be ready if its growth or contraction? I think there is. We'll explore that more later this week in our next article, "Being ready for what comes next". Be on the lookout for it. In the meantime, let me know what you think about how companies are handling things so far.