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Preparing for Recession

With the proper precautions, the looming recession could be a non-event for MHEDA members.
By Alan Beaulieu

Though many people are still feeling the effects of the latest recession, the U.S. economy has actually been on an upswing since the second half of 2009. That recession was the worst of our lifetime, with a 14.5-percent year-over-year decline in the quarterly US Industrial Production figures. Recovery has been slow but steady. However, though it seems like just yesterday, we are actually poised to enter another recessionary period starting in the latter stages of 2013 and extending through 2014.

With the “Great Recession” so fresh in our minds, the prospects of another recession seem daunting. However, this coming recession will be much milder, with a projected 3-percent year-over-year decline. In fact, with the proper planning and precautions, this can be almost thought of as a non-event.

To understand how to prepare for a recession, however, we must examine its root causes.

Contributing Factors

Recovery Sign PostIn the 2nd Quarter 2012 issue of The MHEDA Journal, we wrote, “I will be keeping a close eye on the Congressional elections, because those are the races that will have a long-term impact on the economy. To me, it’s all about who controls the Senate after November 1. I am looking for a strong fiscally conservative majority. A veto-proof Congress of fiscal conservatives should give distributors encouragement going forward…While it may not affect 2012, a lack of fiscal conservatives would leave us at ITR feeling further deflated about 2013 and 2014.”

Suffice it to say, it didn’t break that way. Congress looks remarkably like it did before the 2012 elections, which could signal more gridlock and worst of all, more regulation.

The dawn of 2013 saw us faced with the “fiscal cliff” debate, which ended quickly with a deal struck on January 2. While the potential impact of going over the “fiscal cliff” was wildly overblown by the media, the compromise will have some impact on businesses. Taxes were raised significantly, slight spending cuts were agreed upon, and the can was kicked down the road for two months on more talks on spending cuts in regards to the debt ceiling.

There are three good things to come out of the discussions. One, the increased taxes will be applicable to households making $450,000 as opposed to the originally proposed $250,000.  In addition, the dividends and capital gains tax increases are gentler than would have occurred without the bipartisan agreement.

Lastly, the dreaded Alternative Minimum Tax annual problem looks to have been successfully handled, saving a potential 20 million households from a sharply higher tax bill on 2012 income.  The AMT should not be an issue in the coming years because of the pending legislation.

Health Care
With President Obama winning re-election and Democrats retaining control of the Senate, any prospect of repealing the Affordable Care Act or “Obamacare” is gone. It is the law of the land. And this healthcare law is an added expense for businesses. The Supreme Court ruled that it was a tax and that is exactly what it is. And taxes on businesses generally equate to less being spent on employment, research and development and expansion. It’s a cash flow issue.

It’s also an issue that will impact workers, as well as management. Distributors that have part time employees that are working close to 30-hours per week will have to cut hours. 30-hours will be considered full-time in the future and many employers are cutting hours now and beginning to train additional workers in anticipation of the new definition of full-time employment.

Financial Regulation

Two pieces of legislation that we have been paying close attention to are Dodd-Frank and Basel III regulations. These two regulations will dampen the lending environment, leading to tightened global credit markets and raised borrowing costs.

SEC Chairwoman Elisse Walter announced that the agency is going forward in 2013 with rulemaking mandated under Dodd-Frank and the JOBS Act.  This is despite the fact that the agency’s commissioners are split 2-2 on the issue.  Expect the SEC to put out rules in 2013 that are consistent with the business-unfriendly legislation.

Non-Wall St. banks are seeing their costs move dramatically higher.  They will do their best to pass those costs along to their customers.  Expect higher borrowing costs in 2013 as banks move to cover their bottom line.
More complete enactment of this legislation in 2014 and beyond can be expected to have a negative impact on businesses in the U.S.  That negative impact will not be to the point of bringing on a recession, but it will increase the cost of doing business in the U.S. for most firms.

Protecting Yourself
That all sounds pretty bleak. But there are ways to prepare yourself now to lessen the impact of the impending downturn. It all has to do with benchmarking and taking advantage of the current lending environment before those financial regulations really take hold. You have to strike while the iron is hot.

The first thing that you should be doing in as locking down as many costs as you possibly can. Everything from leases, rent, wage contracts for everyone from the cleaning crew on up. Lock those prices down.

Borrow as much money as you can now, or at the very least lock in the line of equity at a rate that will last for a few years. Right now, it is so cheap to rent money. You don’t want to miss out on this opportunity, because interest rates are only going to go up. Borrowing is going to get tougher. There will be less small banks around and even fewer banks that will be inclined to lend. They are going to be hamstrung by new regulations. Now is just one of those great times to go out there and borrow money while you can.

There are two things that are necessary to know when doing your company forecast. First, you have to know where the economy will be in six to 12-months. A lot of businesses right now are so tied up with the day-to-day pressures that they haven’t taken the time to look six months down the road. The new normal has companies doing more with less people and management doing a whole lot more day-to-day work. It’s easy to focus on the fire immediately in front of our face, but we can’t lose focus of our forecasting. It’s absolutely imperative that we take the time to look at what lies ahead.

Second, you have to know how your industry relates to the overall economy. It’s like white water rafting. You have to know where the rapids are before you get to them. The guy in the back of the raft is at a major advantage. He can hear the people in front of him screaming. But the people in the front don’t get that luxury.
We call this TrendcastingTM and it’s one of the most important thing that we can do. We compare firms’ current and past performance to the economy and find out what leading indicators they need to watch so that there is an actual benchmark laid out. We call them road signs and you have to look at those road signs so that you know what is coming up and you have time to plan and react. Where will you be in the future and how can you get ready for it?

The Bottom Line

Once you have made your forecasts and planned ahead to the coming recession, it’s time to start acting. While there are very few  “recession-proof” markets, there are certainly markets that we expect to stay strong. The most obvious is the energy segment, whether it’s oil or gas. Those are going to continue to play well. Because of that, segments of the transportation industry is going to do well. We still see good things happening in the water industry and, of course, food and beverage are always in demand so MHEDA members can benefit from a stable industry there.

Ultimately, your success boils down to how much cash do you need to grow vs. how much cash do you need to survive? And it actually takes more cash to grow than people think. You can go out of business by not having enough cash when the growth period comes. You will just continue to grow and end up growing beyond your cash reserves. If you grow beyond your working capital requirements, you can very easily find yourself strapped for cash and behind with your creditors. It really takes meticulous planning.

There are certainly landmines to be avoided, but with the proper preparation, MHEDA members can find themselves insulated from the coming recession and poised for some great growth during the next recovery.

beaulieualanAlan Beaulieu is an economist and the president for the Institute for Trend Research, located in Concord, New Hampshire, and on the Web at www.itreconomics.com For a list of the leading financial indicators visit the website or follow ITR on Twitter @ITROutlook.

Alan Beaulieu will be presenting “The Next Economic Cycle,” on May 7th at 1:45 p.m. at the MHEDA Convention.