October 4, 2019
While recent economic signals are far from definitive, concerns regarding a possible recession continue to ripple through the U.S. financial markets and business community. Certainly, some data point to an elevated risk of recession. The Institute for Supply Management’s factory index fell to 47.8 in September, its second consecutive month below 50, and the lowest reading since June 2009, reflecting weaker demand for manufactured goods both at home and abroad.
In early October, the ADP National Employment Report disclosed that private sector employment rose by 135,000 jobs from August to September. As a result, the average monthly job growth for the 2019 third quarter was 145,000, down from 214,000 for the same time period in 2018, as businesses have turned more cautious in their hiring in anticipation of an economic slowdown.
On the other hand, the unemployment rate declined to 3.5 percent in September, according to the U.S. Bureau of Labor Statistics’ jobs report. However, nonfarm payroll employment only rose by 136,000, which was shy of economists’ consensus expectations of 145,000 new jobs.
Regardless of one’s assessment of the economic data, businesses cannot afford to take a passive stance and risk becoming the victims of circumstances. When our clients solicit advice, I advise business executives to view potential dislocations such as a recession or downturn as opportunities to position their companies to survive – and thrive – in a range of economic scenarios.
Stronger businesses often have incredible opportunities in a recession. They come in the form of acquisitions that can be made on more acceptable terms, or the potential to take market share from less robust competitors. Thus, businesses may benefit by considering the following actions and adopting those that make sense for their individual situations:
- Cash is king, as it provides financial flexibility and a range of strategic options, so consider increasing your access to cash. This may mean adding to actual cash balances, but it also applies to pre-arranged lines of credit that will then be available to the company when opportunities or challenges arise.
- Minimize long-term expense commitments, such as leases, service contracts, or purchases of specialized equipment. These obligations reduce your flexibility to react to opportunities.
- Stabilize revenue sources by protecting contract value (such as through hedging). Also, consider extending contract terms to firmly embed your business into your customers’ supply chains.
- Economic downturns often leave talented employees without jobs. A stronger business can take advantage of opportunities to add key team members, so identify this talent in advance and be ready to move quickly. Top producers at struggling competitors can be a gold mine of talent.
- Watch competitors for signs of weakness, and quickly adjust your focus as conditions permit. For example, you may want to consider entering a market where a faltering competitor may be leaving a vacuum.
- On the other hand, while a downturn may produce opportunities to expand into new areas, this is not the time to venture too far afield. Stay focused on the businesses you know well and in which you have significant experience. Don’t chase an opportunity for a “deal” that is outside your wheelhouse.
- Finally, remain flexible regarding strategy and consider adjusting as the market delivers opportunities (such as entering wider geographic markets or adjacent product/service lines).
Above all, remain calm and deliberate. As Warren Buffett famously said, “Be fearful when others are greedy; be greedy when others are fearful.”
By Christopher D. Maher
Chairman, President & CEO, OceanFirst Financial Corp.