For its first two decades, the 21st century has exhibited an unfortunate tendency to toss humanity from one dramatic and often terrible event to the next, like falling dominoes of bad news. And while history shows such times are not unprecedented, that’s cold comfort. People are more concerned with living through their present than with how much it might resemble events of the past.
These events have roiled the waters for businesses and the global economy as well. They include terrorist attacks, the Great Recession, political polarization, a global pandemic, another recession, war in Europe and widespread inflation.
It’s tempting to hope things get better. It’s smarter to find ways of preparing workforces for the possibility of a third 21st-century recession in the near future (which appears likely) and other less-than-ideal events of an unknown nature.
Will We Go Through Another Recession Soon?
Officially, the 2020 recession caused by the pandemic is over. As short as it lasted, the recession led to about 25% of the U.S. workforce – 40 million people – filing for unemployment. It shuttered businesses across the country. It touched the operations of almost every business in some way.
The question now is what Franchise 500 calls “the long, unknown financial road ahead of us.” As businesses reopened in the past year, millions have rejoined the workforce (the unemployment rate hovers around 3.6%) and there’s been a mini-economic boom.
But troubling signs loom. The Federal Reserve continues to raise interest rates. High inflation, the worst in 40 years, is impacting consumer spending. And Russia’s invasion of Ukraine has driven oil prices higher, dampening worldwide economic growth. The World Bank projects global economic growth to decelerate from 5.5% in 2021 to 4.1% in 2022, falling to 3.2% in 2023.
While these worrying signs are mitigated by low unemployment, it’s enough to signal that employers should take steps to prepare workforces for a recession.
The Impact of Past Recessions
While historians are quick to note each economic recession differs in some details, there are lessons business leaders can learn from the recessions of the past. One of the most profound is job loss. Total employment dropped by 8.6 million people during the Great Recession of 2007-2009, for example. Unemployment peaked at 10% in October 2009 and did not return to pre-recession levels until 2016.
Recessions also lead to a reduction in consumer spending, which causes a downward spiral in the economy. These periods impact minority and economically disadvantaged communities the hardest. Those without much in savings or any type of investments struggle to make ends meet. This has far-reaching and often tragic consequences, such as people deciding not to spend their money on needed prescription medication because they need it for food or to keep the lights on.
Even those who still have a job may curtail spending out of fear they will lose their job.
In this mix of fear, anxiety and hard economic realities, business leaders can make a difference by preparing for the potential of an economic storm now.
Steps Companies Can Take to Prepare for a Recession
In looking at past recessions, companies that survived the best did so because of how they operated their business. The Great Recession provides many examples of where the following five factors played a role in how well a business weathered the economic storm and, by extension, protected its workforce from experiencing widespread job loss.
Strong cash position. Cash, as they say, is king. Most businesses take on debt to launch or expand, but it’s important to pay that debt down quickly as overly leveraged companies face difficulties during recessionary times. Strong cash flow and cash in reserve enable a business to maintain operations and preserve jobs.
Diversified customer base. Much like a stock portfolio, businesses survive economic turmoil better if they serve a diversified customer base. Businesses that sell to just one or two customer segments run the risk of suffering worse damage if a recession impacts those segments.
Strengthened operating systems. Businesses benefit even during the worst of times from operating systems that emphasize strong cash flow, efficiency, reduced waste, customer needs, and a culture of continuous process improvement.
Create a diverse workforce. A diverse workforce is more resilient in times of trouble, including economic downturns. Smart business leaders build a workforce of people of different genders, races, ethnic origins, religions, ages and sexual orientations.
Perhaps the most important thing is to avoid complacency. Business leaders in 2006, 1986 or 1928 who saw nothing but continued success ahead felt the impact of the next year the worst. The best way to prepare your workforce for a recession is to always remember the next one could be on the horizon.
Keeping Underrepresented Employees in Mind
Economic downturns tend to impact those from underrepresented groups the hardest. Even before the pandemic-caused recession, unemployment rates were higher for people of color than they were for white workers, according to Forbes.
For example, the unemployment rate for Black workers is historically about twice as high as that of white workers. Forbes writes that “many Black, Latinx and Asian workers experience systematic obstacles to getting and keeping a job.”
Women also have a higher unemployment rate than men, especially women of color. Forbes reports that in September 2020, when white men had an unemployment rate of 6.9%, unemployment for Black women (11.4%), Latina women (11.5%), Asian women (9.7%) and white women (7.2%) all ranked higher.
All the steps mentioned above to prepare a business for a recession – especially building a diverse workforce – benefit underrepresented groups. Gartner advises that focusing on diversity, equity and inclusion during times of disruption strengthens a company. By training managers on the connection between DEI and business outcomes, including crisis resilience, companies can better prepare the workforce for a recession.