With second-quarter U.S. gross domestic product down from the prior quarter, there’s heightened debate around whether the U.S. economy is already in or heading toward a recession. We walk through the key aspects shaping that debate and offer strategies for business leaders to consider during periods of heightened volatility and slower economic growth—including a recession.
First, we have to answer a different question: What counts as a recession?
A recession is informally defined as two successive quarters of negative GDP growth. The last two quarters fit that bill, with GDP contractions of 1.6% in Q1 and 0.9% in Q2, as calculated by the Commerce Department.
An official declaration of recession in the U.S. would come from the National Bureau of Economic Research (NBER), which incorporates a broader range of indicators, including employment markets. But it could take months before NBER issues an announcement.
JPMorgan Chase looks at a combination of economic factors and market signals to inform the thinking around the potential onset of a recession. At the end of July, the firm’s models pointed to slightly less than a 50% chance of recession within the next year. Meanwhile, volatility and significant corrections in the stock and bond markets were pricing in a much higher recession risk of between 75% and 80%.
Some industries tend to be more or less recession-proof. Consumer staples, healthcare and food are examples of relatively inelastic products and services that consumers buy even when household budgets tighten.
Terminology aside, two consecutive quarters of real GDP contraction illustrate the risk of slower economic growth and the need for boards and management teams to prepare for continued uncertainty.
We offer three key ways business leaders can prepare for a potential recession.
Manage the risks within your control and retain a flexible cost structure and business model. Be proactive and devise an action plan for any potential slowing of sales and profits:
Whether or not a recession materializes, business leaders should be prepared for multiple scenarios. Companies have been forced to be nimble the last few years, and we expect that mentality to be a requirement for operating sustainably in the near- to mid-term.
Maintaining a financial bill of health that can withstand shocks is paramount in a recessionary environment.
A downturn is more of a buyer’s market, creating unique opportunities for some companies.
Note that at the end of July, S&P 500 valuation multiples had contracted significantly in 2022.
There will always be pockets of opportunity and growth in any economic cycle. Many companies focus inward during a recession, but that may mean missing a unique chance to scale with a strategic merger or acquisition.
Our team of experts is ready to help you navigate whatever comes next. Get in touch.
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