Should your business borrow if a recession is imminent?
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If you follow economic news, you’ve seen plenty of debates about whether the United States is slipping into a recession. Bankers generally steer clear of media hype and talking heads. Instead, we study economic factors to detect worrisome trends.
While we’re not convinced a recession is imminent and inevitable, we do see some indicators that have captured our attention. For example, the traditional (but not official) sign of an impending recession is two consecutive quarterly drops in the nation’s Gross Domestic Product (GDP). We saw a 1.4 percent reduction in first-quarter numbers. As I write this, the Department of Commerce just announced a 0.9 percent decline for the second quarter.
In early July, the spread between the 10-year Treasury Bond rate and the two-year rate fell into negative territory. Historically, such drops tend to occur six months to two years before recessions begin. This indicator isn’t foolproof, but it has happened before every recession between 1955 and 2018, so we’re watching closely.
Indiana is a manufacturing state, so we also look at trends related to production, like the Purchasing Managers Index and estimates of RV production (which analysts believe will experience an 8.4 decline over the next year).
Those are some of the many statistics we track as we make our own business decisions. (If you find such information fascinating, I’d recommend a visit to my favorite economic data source, the St. Louis Fed’s FRED site, https://fred.stlouisfed.org/)
Like all those economic experts who keep popping up on TV, I’m not willing to make a definitive call about the prospects for a recession. But savvy business owners and mangers know it’s important to prepare for all types of economic cycles. As a company decision-maker, it pays to ask yourself and your management team some tough questions. For example, what will you do if loan interest rates unexpectedly jump by two or three percent? If Indiana’s manufacturing output were to fall by 10 percent, how might that affect your company? Consider how different scenarios might affect you, your customers, your suppliers, and the market as a whole.
Too many business leaders react to negative forecasts by freezing in fear. Your strategic plan may have called for a significant investment in production equipment this year, but the thought of a statewide downturn coupled with higher capital costs may have you thinking about a delay. Perhaps you were planning to increase your headcount by 50 people this year, and now you’re wondering whether that’s prudent.
Bankers are accustomed to the ebb and flow of economic cycles, and commercial loan requests often reflect how confident business leaders are feeling. When the economy is on the upswing, we see more applications for loans … especially while interest rates have remained near historic lows. But let the national media start tossing the “r” word around, and we see retrenching.
That’s human nature, but it’s usually not a good business move. When companies give in to rumor and panic at the macro level without considering how changes will affect them at a micro level, they may miss out on great opportunities. If you can stay the course and stick to your strategy while your competitors are panicking, you’ll be better positioned to remain strong during a recession and recover more quickly when the eventual upturn begins … and begin it will.
Yes, investing in your business in the face of economic volatility carries a certain degree of risk, and it may even be more risk than your normal comfort level will allow. However, if that investment is a component of a sound strategic plan, it’s probably still a good idea to proceed. After all, you can’t predict exactly what economic conditions may be in place by the time your transaction is complete.
Does that mean you shouldn’t adjust your plan in light of changes in economic conditions or the marketplace? Not at all. If you were planning to drive to California and encountered a brief detour in Colorado, you probably wouldn’t give up on your plans and head home. Instead, you’d adjust your route and schedule to accommodate the unexpected change.
None of us has the power to eliminate uncertainty, but we can all take steps to manage in the face of uncertainty and even mitigate many of the potentially negative effects. That’s why it’s always a good idea to turn to experts you trust when developing plans. Your attorney, your CPA, and yes, even a loan officer can recommend strategies to keep factors you cannot control from derailing your efforts.
It’s smart to pay attention to economic factors, but don’t fall prey to fears based on media hype and self-styled experts. Having a sound plan and listening to experts you trust is a far more prudent approach.
Karen Gregerson is President & CEO of The Farmers Bank, a locally owned and operating bank with 11 banking offices in Central Indiana.