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 managers 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 your banker 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.
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Karen Gregerson is
President & CEO of The Farmers Bank, a locally owned and operating bank
with 11 banking offices in Central Indiana.
The Farmers Bank is a $800 million asset
organization chartered in 1876 with headquarters in Frankfort, IN. The Farmers
Bank is locally owned and operated with 11 banking offices located in Central
Indiana providing retail, business, investment & trust services, mortgage,
and electronic banking services. Member FDIC, Equal Housing Lender.