How to Win in the Next Recession: What Boards Should Know About Preparing for and Innovating Through the Next Downturn

With each passing month, the current US economic expansion, already the longest in the post-war era, sets a new record. But economic warning signs are mounting. The ongoing trade war with China continues to be a drag on the global economy. Construction spending in the US was down more than 2 percent for the first eight months of 2019. The manufacturing sector shows continuing signs of weakness. The September 2019 Institute for Supply Management (ISM) index hit its lowest reading since June 2009. Consumer spending continues to buoy the economy for now, but for how long?

In the summer of 2019, Grant Thornton surveyed more than 250 business owners and C-level executives at companies with between $250 million and $3.5 billion in annual revenues on recession-related topics ranging from when they expect a recession to how they are preparing for it and how they plan to respond once it arrives. One key finding? Most think the current expansion is nearing its end.

Of the majority of respondents, 62 percent expect a recession within the next 18 months. Delving deeper, private companies are somewhat more pessimistic, with 39 percent seeing a recession in the next 12 months, while public companies’ respondents were more likely to see the recession starting in 12 to 18 months. Only one-quarter of respondents do not expect a recession within the next two years. Most companies, however, see continued investment in innovation as a key to succeeding through the next recession. The challenge for boards? Helping to ensure companies accurately understand the challenges of doing so.

When asked what is most likely to trigger a recession within the next year, the most common answer was Regulation/Trade/Tariffs at 17 percent, followed by Interest Rate Hikes (14%), US Policy Uncertainty (13%), and Slower Global Growth (12%). There were, however, some significant differences in trigger rankings between public and private company respondents. Boards can help management understand, anticipate, and prepare for the links among these triggers.

Tariffs and policy uncertainty currently are a drag on global growth and, while federal policy in the United States is currently leaning more toward cuts than rate hikes, already low interest rates leave limited room for central banks to maneuver.

Public-company respondents were more than twice as likely as their private-company counterparts to choose interest rate hikes as the most likely trigger (20% to 9%), and they are significantly more concerned about exchange-rate volatility (14% to 9%). Meanwhile, private-company executives were almost three times as likely to cite availability of credit (15% to 6%) as the primary cause for a recession, and they are 50 percent more concerned about US policy uncertainty (16% to 10%) than their public counterparts.

Tariffs and their impact on global growth have been a growing concern for businesses and economists alike. Among respondents to the survey, 42 percent report that tariffs have had a negative effect on their business, while 27 percent report a positive impact, reflecting the overall view that tariffs are a drag on the global economy.

Diane Swonk, Grant Thornton’s chief economist, offers a warning on shifting international political trends. “Older electorates with atavistic tendencies—a longing for a return to the past—are voting in autocratic leaders who are ushering in a new era of nationalism, harder borders, and a backlash to anything foreign, like immigrants and trade,” said Swonk. “The result is a cascade of policies that tend to curb growth, or worse. Countries led by autocrats tend to trigger negative economic outcomes.”

How companies are preparing for recession

The question for boards? How to help your company prepare and shape the right strategy to navigate the next downturn. Benchmarking your company’s strategy against its peers is a good place to start.

Well over half of the companies we surveyed not only believe a recession is coming, they are actively planning for one.8

We asked respondents about four common strategies that companies could implement to prepare for a recession:

• Crisis management planning to frame likely recession-based scenarios and the company’s response to them
• Stress testing to determine how well the company can weather issues like decreased revenue, increased interest rates, or lack of available lending resources
• Supply chain resilience strategies that can reduce costs and offer alternatives in the event of supplier failures or ongoing trade-war issues
• Cash flow modeling to accurately forecast cash flow and offer alternate options to maintain a healthy cash position

Across the board, the majority of companies either already had plans in place or were currently implementing plans in each category.

Whether or not you see a recession as imminent, it makes sense to be prepared for one. Boards should check where their management stands with their recession planning and reality check the nature and extent of those plans against their company’s unique strategy, industry concerns, market conditions, and exposure to specific risks. Boards of smaller enterprises should be especially diligent. Our survey finds that companies with revenues between $250 million and $500 million are less likely to have plans in place than their larger competitors.

The board should be checking what areas of potential stress management is actually testing and they should be ensuring that management has sufficient forecasting and other cash-flow modeling processes in place to provide early warning of cash issues in the event of a downturn. Scott Davis, a partner in Grant Thornton’s strategic solutions practice, explains: “The fact that companies want to keep innovating through a recession is great, but in a recession cash is king. If you run out of cash, you run out of options. Smaller companies in particular should be stepping up their forecasting efforts. They often have less cushion to begin with, so disciplined cash management is even more vital.”

Interest rate and debt are other areas boards should ensure are receiving sufficient focus. Grant Thornton’s survey shows a relative lack of concern about interest rate increases, which may be a sign of short institutional memories when it comes to recessions. “During the Great Recession, lack of available credit was one of the major factors in many business failures,” said Davis. “Yet in this survey, while 65 percent of respondents view access to capital as a key risk in the event of a recession, only 27 percent have indicated plans to increase credit lines as a strategy.” Davis recommends that boards push management to take a close look at their current and projected credit needs now, while rates remain low and restrictive covenants are uncommon. “Once a recession hits, credit can be very hard to come by,” said Davis.