To beat inflation, maybe you built up inventory, or raised prices, or borrowed more to meet expenses. Now, with recession looming, those smart inflation moves may be turning into hurdles. Bank of the West Chief Economist Scott Anderson says there are moves business owners can make now to stay ahead of the new economic reality.
Is a recession inevitable?
“I’d say the chance of recession is high at around 60 percent. There is about a 50 percent chance it’s a mild recession and a 10 percent chance it could be something more severe. There’s maybe a 35 percent probability we avoid a recession all together, but only see sluggish growth.
“If a recession comes, it’s going to come sooner rather than later, in my view. Growth slowed rapidly in November and December. So, maybe by the end of the first quarter or in the second quarter we will be in a true recession. I think the worst part of it will be somewhere in the middle of the year, in the second or third quarter.”
“Consumers are becoming a lot more cost-conscious.”
Is consumer spending holding up?
“The consumer is kind of running out of gas, so to speak. Consumer spending was still quite strong in the fourth quarter, but we saw a measurable deterioration in November and December.
“We’ll see a further slowdown in consumer spending in the first half of this year, but by the second half, inflation should come down enough that people who manage to hold on to their jobs will actually see better real income growth. And that’s what matters most for the economy because with real income growth, people will start feeling confident enough to start spending more normally again.”
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What’s this mean for small businesses?
“Some of the small business confidence surveys that we track are back down close to pandemic lows. It’s not hard data, but it suggests that economic and financial conditions are worsening, and small businesses are starting to feel the direct impacts.
“For many small businesses, pricing power is beginning to fade. Small businesses have been able to pass along cost increases to customers over the past year and a half. Now, it’s going to be more challenging to do that.
“Consumers are becoming a lot more cost-conscious. You see a lot of consumers, especially those with lower incomes, trading down, substituting higher-priced goods for lower-priced goods. We know that. We know a lot of small restaurants have tried to simplify their menus and substitute in some cheaper ingredients. That’s probably going to continue for some time.
“On the bright side, those folks who are having trouble attracting labor and keeping labor, seeing their best employees go to bigger companies, that’s going to be less likely to happen in the coming year.”
“Be nimble and don’t put all your eggs in one basket.”
How can businesses cope with these conditions?
“A mild US recession is still likely coming this year, so you will have to have the ability to roll with the punches.
“First, I would say really look at your cash flow. This is not the time to over-extend yourself in terms of debt. People get in trouble because of over-leveraging or trying to expand too quickly.
“Second, even though we’re predicting a mild recession, there’s no guarantee it’s going to stay mild. There could be other shocks. There’s the war in Ukraine. And, we are seeing a general slowdown globally. We think there’s a 55 percent chance of a global recession.
“And you’ve got China, which has been really holding back the global economy because of their COVID-19 policies and supply chain disruptions. They’ve now opened up their economy, and we’ve actually got an optimistic view that China is going to grow better this year than it did last year. They’re actually cutting interest rates while every other central bank in the world is raising them. That’s a possible upside.
“Finally, my advice for small business owners is to be nimble and don’t put all your eggs in one basket, particularly if you’re in the Bay Area or California, which is getting hit harder than the nation as a whole right now. If you operate in other areas of the country with demographics that are a bit more insulated against recession, look for opportunities to increase sales in those other areas. Or even look at growing online sales as an alternative market that will help stabilize overall sales and your bottom line.”
Clearly, this year already looks as complicated as 2022. The good news is there are strategies that worked in the past that can help drive business growth this year, as Paloma Vidgen, Bank of the West’s Head of the Women Entrepreneurs Segment Strategy, explained recently. If you want to learn more about navigating the new economic reality, a good place to start is by reaching out to a financial partner with a strong reputation for serving businesses.