While we cannot yet establish whether we’re truly in a recession, the risks are increasing — and small businesses will want to prepare either way.
The U.S. economy has shrunk for two quarters in a row, according to recent data by the Bureau of Economic Analysis. The advance estimate shows that real gross domestic product (GDP) decreased by an annual rate of 0.9% in Q2 2022, following a decrease of 1.6% in Q1 2022.
With two straight quarters of economic decline, small business owners may worry about whether the U.S. is experiencing (or headed toward) a recession. While we cannot yet say with certainty whether our nation is facing a recession, small business owners will still want to monitor economic activity and prepare for the worst-case scenario.
What defines a recession?
According to Curtis Dubay, Chief Economist at the U.S. Chamber of Commerce, whether we are in a recession “is a more difficult question to answer than usual.”
The typical definition of a recession is two consecutive quarters of the economy shrinking. However, decreasing GDP isn’t the only determining factor.
“Other key economic data matter, too […] like income, job growth, consumer spending, and manufacturing output,” Dubay explained. “In normal times, if the economy is contracting, all these important economic indicators are falling too. However, we are not in normal economic times, so the typical pattern may not hold.”
Dubay noted that many of these additional economic indicators are holding steady, despite falling GDP:
- Income growth and job gains have remained consistent over the past year.
- Job openings have dropped slightly but are still at record highs.
- Consumers continue to spend despite high inflation rates — “in part because they have built up savings they accumulated during COVID, and manufacturing output has been holding up,” said Dubay.
It would be difficult to call a period where this continues a recession, even if the economy meets the technical definition of one.
Curtis Dubay, Chief Economist, U.S. Chamber of Commerce
Reading the signs of recession
Even if we can’t conclusively say the economy is in a true recession right now, a second straight quarter of declining GDP may signal a slowdown in economic momentum. Q1 2022’s supply chain issues, along with trade imbalances and decreases in inventories, began the trend. As Q3 2022 gets underway, ongoing inflation and spiking Federal Reserve interest rates could push the economy closer to a true recession.
Dubay added that regardless of whether a recession occurs, consumers and businesses are still feeling the impact of an uncertain economy — and many are taking action accordingly.
“Consumer sentiment about the economy … is lower than even during the first few months of COVID in mid-2020,” he said. “Similarly, business confidence is down sharply, and businesses are cutting back on investment.”
How to prepare for a potential recession
As risks of an economic downturn increase, small businesses should prepare accordingly. Here are some tips to recession-proof your business and withstand any economy:
- Be adaptable. Strategies and offerings that have worked in the past may no longer be feasible, or may not meet your customers’ current needs. Be aware of the current economic climate, listen to your client base, and conduct the necessary research. Based on the information you find, prepare to adapt or pivot accordingly.
- Know your finances. Monitor your cash flow, profit margins, and other financial metrics to understand where your business stands. Cut unnecessary costs to prevent overspending and offer a safety net in the event of a recession.
- Keep investing in your business. Cutting your budget doesn’t mean you should stop investing in your company — you just want to put your funds where they’ll make the most impact. Continue to invest in marketing and advertising efforts and seek growth opportunities whenever possible.
- Communicate openly with your team. Economic downturns are stressful for business owners and employees alike. Keep your team informed about the state of your business and the “why” behind important decisions. You may also consider supplementing your business with freelancers prior to a recession to ensure agility and adaptability.
While small businesses would be wise to recession-proof their operations, they can also plan ahead for brighter days, said Dubay.
“Inflation will come down and conditions will feel more like normal, probably within a few years. At that point, the economy is poised to grow strongly,” Dubay explained. “It would be helpful to be ready to enjoy that coming boom period, so as not to miss out on it at the beginning.”
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.