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What’s happening in the news
Are we in a recession? Are we in recovery? Why is unemployment so low when things seem…kind of dire? What’s going on with gas, Ukraine, and supply chains? If you’ve read the news lately, there seem to be a lot of trigger-term-stuffed headlines and thought pieces with experts saying “we don’t know.”
For better or for worse, “we don’t know” is pretty much all you need to know. There’s a lot happening right now, but no good understanding of what it all means.
Here’s what we know for sure:
- Inflation is very high (well above the 2% annual target), and the Federal Reserve is raising interest rates to combat it. Key figures in the Fed name inflation as their number one concern.
- Inflation has slowed more than expected, but is still at 8.7% as of July 2022.
- Unemployment numbers are curiously steady and in the range of healthy. This is counter to what we typically see in recessionary environments.
- GDP has shrunken for two consecutive quarters, which is traditionally when we’d cry “recession.” However, the National Bureau of Economic Research (NBER) has not stated that we are in a recession.
What Ken thinks & why
Labels don’t really matter. Sometimes talks predicting recessions or downturns can even create panic in the markets that doesn’t need to be there.
If we take a step back, GDP isn’t necessarily the best measure right now. For the past few quarters, the economy has been overheated, which is why we’re seeing inflation in the first place. So, a shrinking GDP isn’t necessarily an indicator that the economy is shrinking and going into recession; it could be that everything is simply getting back to normal.
Because of this, Ken thinks that jobs and inflation are better indicators to tell us what’s up with the economy. This is because these two data points give us a better understanding of how the average American is being affected.
So, what IS up with jobs and inflation, then?
The unemployment rate is actually quite healthy right now at 3.5% (most economists consider 4-5% unemployment to be healthy). This is different from previous recessions. For example, during the Great Recession, unemployment peaked at 10%. That said, prices are so high among everyday essentials like gas and food that real wages are down, despite people having jobs. Because of this, many experts are scratching their heads, unsure of what it could mean for the economy in the near future.
Let’s move on to inflation. Here’s what we know: the Fed’s number one concern is inflation. The last time inflation was out of control was in the 80’s. To combat it, the Fed triggered two recessions in 1980 and 1981-82. This move was aggressive and painful, but widely applauded by economists for its efficacy. If the name “Paul Volker” rings a bell, it’s because these were his policies.
It’s possible that the Fed may do this again, although no one can ever say for sure.
The real estate market as a blueprint
While we can only speculate so much, Ken says that it’s possible the real estate market could foreshadow what’s to come. During the pandemic, low rates combined with increased demand due to remote work-related movement and limited housing supply created the perfect storm for real estate to balloon in price. Now that rates are higher (among many other factors), the real estate market is correcting, and prices are coming down. Real estate isn’t cheap now by any means, but it isn’t as out of control as even just a few months ago.
We might expect to see similar behavior in the broader economy.
How small businesses should prepare
At a very high level, here’s what Ken recommends:
Diversify your revenue streams.
A simple rule to follow is to focus on creating multiple streams of revenue, while staying focused on your key value drivers. Getting distracted from your business’s core mission and functions can be just as detrimental as putting all your eggs in one basket. Plus, spreading yourself too thin can lead to failure and burnout.
The final rule for diversifying is to try and move away from reliance on other businesses for your revenue. For example, if a large portion of your business relies on affiliate revenue, consider what you could replace that revenue stream with. Many affiliate programs get turned off during slower economic times, and that income might not be there for you.
Stay on top of your cash flow
For small businesses especially, it is extremely important to be mindful of your cash flow at this time. Try to stress test your business by running a few scenarios. For example, what happens if sales come in 25% or 50% lower than expected? Do you have enough cash for the business to survive? Can you cut expenses by the same amount to mitigate cash flow impact?
If you’re looking to borrow, lenders look at how you intend to use the money. If you are looking to borrow to pay down debt (as in a business debt consolidation loan), it may be difficult to get approved. Instead, look for ways to use the capital for revenue-generating activities, such as customer acquisition or business expansion.
Stay informed, stay the course, and let tried and true business best practices carry you. You got this!