Business Environment in a Recession

ButcherJoseph & Co.: Through the lens of the two most recent major economic cycles, we will explore how recessionary and non-growth environments provide attractive conditions for business operators to opportunistically invest and promote long-term financial success.

In growth economies fueled by low interest rates, all market participants undertake strategic initiatives. Often, resource scarcity triggers a competitive landscape, which ultimately increases prices and reduces overall returns. The growth-at-all-cost conditions limit overall effectiveness and lead to marginal impact beyond competitors, but such initiatives must be undertaken to remain competitive.

In non-growth environments, business operators can employ a variety of strategies to sustain and improve their competitive position. Under these conditions, growth initiatives are less a function of necessity and more so of proactivity: more often than not, responsive actions tend to be austerity measures such as workforce reductions, production halts, and other changes that maximize financial comfort. While these alterations effectively ease near-term cash flow challenges, they come at the expense of longer-term ambitions and may ultimately reduce competitive footing and market share. The “protective” sentiment in these periods fails to recognize the abundance of opportunity: as competitors retreat and scale down, operators may find low-cost routes to new markets and customers.

Many of our clients have outlined a progressive approach versus protective response, seeking incremental market share and investing in their business. Investments are often undertaken to improve human and physical capital, which strengthen barriers to entry or enhance company-specific intangibles that increase value proposition versus competitors. While some respond with stabilizing but constrictive measures, successful operators will capitalize on the opportunity to capture key inputs such as qualified employees, advanced technology, modernized equipment, and even acquisition candidates. In recessionary environments, workers, technology, and capital equipment are often abundant, and prices are negotiable.

While not all businesses will be positioned to make sizeable growth investments during a recession, tactical investments can provide attractive returns and outsized value creation as compared to growth environments. By taking inventory of where cash must be preserved, operators may prudently reinvest remaining capital to accelerate market capture and growth when emerging from economic slowdowns.

The Signs are There ~ Planning Time is Here

ITR Economics: Most of the economic signs are pointing to a recession. We are going to go over those as well as the adverse impact of the ongoing inverted yield curve. However, there is some positive movement in some leading indicators. While we expect the green shoots we are seeing in the residential housing market, the potential suggested by the upturned leading indicators bears analysis and discussion.

Of concern is the decline in savings account balances, which suggests that consumers may forestall large purchases (ranging from cars to remodeling) even though real incomes are still going up. We will look at this trend at our upcoming joint webinar with ButcherJoseph & Co.

The most pronounced of the negative impact of higher interest rates has yet to hit the consumer and therefore the broader economy. We think the trend in interest rates over the next six months is going to be critical to the timing of the projected 2025 recovery. Without some easing in interest rates leading to a normalized yield curve, the 2025 onset of recovery could be delayed.

This is a complimentary webinar presented by ITR Economics CEO and Chief Economist Brian Beaulieu and ButcherJoseph & Co. Managing Partner Keith Butcher. Join us on September 21, 2023 at 2:30 p.m. ET!