Are we going to have a recession? Of course, the only question is when. Here’s my prediction: It has already started. The statistics that will confirm this are a lagging indicator; we’ll learn this summer that it started in May.
I wouldn’t be so sure but the Fed’s efforts to stop inflation seem to guarantee a recession. The rate increases, and the delayed but certain effects on the economy, seem to make a recession inevitable. And the hesitancy of all of us to grow our businesses, buy a new house or car, or take a new initiative, seem to ensure this self-fulfilling prophecy.
I’m old enough to remember the last time the Fed attacked inflation. Back in the late 1970s and early 1980s, inflation was well established and higher than what we’ve experienced recently. It was persistent over a period of years. Paul Volker’s Fed decided to tame inflation.
On October 6, 1979, Mr. Volker held a Saturday evening new conference to announce that the Fed was declaring war on inflation. “We mean to slay the inflationary dragon.” A month later, the prime rate peaked at 21.5 percent. I was a young controller at the time for a real estate development company. We had one construction loan with a rate of prime +4 percent, so, yes, we paid 25.5 percent interest for a short period of time.
The Fed’s policy drove the economy into a deep recession. The unemployment rate reached 10.8 percent. Eventually the dragon was slain. But the cost was high.
Our current situation is much less dire, and I guess the Fed wants to keep it that way. Personally, I don’t really care what the price of gasoline and groceries are, but many others do care. Probably for reasons many can’t articulate. And it is a political issue, but isn’t everything these days? And so, the Fed will surely tame inflation and, I believe, incite a recession.
So, what do we do?
We do all the stuff you do when you see a recession in your near-term future. Growth plans are paused. Capital expenditures are put on hold unless they are a direct replacement for something they must be replaced; something essential.
Hiring freezes will probably be instituted by many. I’d advise not having a hiring freeze but slowing the rate of hiring and being very deliberate in any new hires.
Speaking of deliberate, time to revise the 2022 budget and extend it into 2023. Expect sales to be lower, which will probably mean considering layoffs. I’m hoping the tight labor market is going to disappear with this, but we’ll see. The world is different post-pandemic.
Try to extend or increase lines of credit. Be careful about other debt as one likes to go into a recession without too much leverage. Keep your ‘power dry’ and hope there are some acquisition opportunities that come up among the less prudent businesses.
This could be a wild ride.
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