Wednesday, January 23, 2008

Britney or Recession?

Two words I've heard too often in the past few weeks.

In macroeconomics, a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year. In the United States, GDP is officially tracked by the Commerce Department's Bureau of Economic Analysis. An alternative, less accepted definition of recession is a downward trend in the rate of actual GDP growth as promoted by the business-cycle dating committee of the National Bureau of Economic Research.[1] That private organization defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." A recession may involve simultaneous declines in measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression. A devastating breakdown of an economy (essentially, a severe depression, or a hyperinflation, depending on the circumstances) is called economic collapse. Newspaper columnist Sidney J. Harris distinguished terms this way: "a recession is when your neighbor loses his job; a depression is when you lose your job."
Market-oriented economies are characterized by economic cycles, but actual recessions (declines in economic activity) do not always result. There is much debate as to whether government intervention smoothes the cycle (see Keynesianism), exaggerates it (see Real business cycle theory), or even creates it (see monetarism).
I think it's time we also debated the effect the media plays in our economy - if enough people hear, read, or blog about it, does it make it true?
Believe it or not, most economists say we've seen a recession in the U.S. every 6 - 8 years. Some businesses (like housing) or regions (like Michigan and NE Ohio) are already in a recession, based on the definition above.
So, what types of business will survive a recession, and what types hold up pretty well during a recession? Two things we know for sure - death and taxes. Therefore, the funeral home guys and the tax accountants are pretty safe during a recession. Safe to say that doctors and insurance people do ok as well.
Carmakers and car dealers often have a tough time during a recession, because when times get tough, people tend to put off buying a new car, it's just too scary to make that longer-term decision. But how about your business? Are you recession-proof or recession-resistant?
Here are some strategies to think about as we consider the effects of a recession nationwide:
1 - It is more important now than ever to keep a close eye on your competitors' pricing. As money becomes tight and consumer spending contracts, some businesses will cut prices as demand dries up. You need to be aware of what is going on in your marketplace, and react (or act) appropriately.
2 - Watch your debt load and cash flow. Even though the Fed reduced "an" interest rate this week, it may not necessarily make it any easier for a business owner to borrow more money to get through a downturn. Review costs and eliminate waste. (Good advice anytime, but during a recession this can mean the difference between staying in business or closing the doors.)
3 - Talk to your customers. Find out if they plan to reduce their regular maintenance, or if they are putting off major purchase and respond accordingly. If your regular customers plan to cut back on repairs, you need to widen the net you cast and develop new customers and new markets to make up for the lost income, or you will need to make changes to cope with the loss.
Surviving a recession as a business requires strategies that you probably use all year round. It's just more important now to keep them top of mind and in effect.

No comments: