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Why Recessions Are Necessary – John LaRosa

Aug. 15, 2019

In a capitalist economy, the normal business cycle includes both expansions and recessions (two consecutive quarters of negative growth in the GNP). Usually, recessions take place every four or five years. However, since the Great Recession of 2008, it has been a most unusual 11 years of expansion. We are long overdue.

As seen in past times, such as the roaring 20s, good times don't last forever, and excesses are built up that are best eliminated. Sometimes this "cleansing" process is mild and sometimes it's brutal (as in the Great Depression). The Great Recession of 2008 was in the "brutal" category, as banks, insurers, real estate agents and firms, auto manufacturers, home builders, the stock market and many other companies felt the pain, laid off employees and some went out of business.

I (and Marketdata), my market research firm, have been factoring a 2020 recession into the forecasts in our various market & industry studies for some time now. How deep the next recession will be is anyone's guess, but it should be mild to moderate--not as deep as the Great Recession of 2008. Other pundits may disagree.

History tends to repeat itself, and consumers and companies repeat their mistakes. Consumers may build up large credit card balances, loans and other forms of debt. Companies may over-expand and get into riskier lines of business than usual. Start-ups and entrepreneurs may create overly optimistic sales projections based on forever-growing demand. Banks may loosen their criteria for mortgage qualifications, granting large loans to consumers with inadequate income.

Recessions tend to wipe out these "excesses", and "correct" the economy. Thus, they are needed every once in a while. Eliminating excess is a good thing. It brings consumers and companies back down to earth.

The bottom line -- plan for 2020 with caution. Weed out the unnecessary expenses, look at cost controls, add staff cautiously, and plan for lower demand and lower sales next year. Scrutinize carefully whether you really need that extra branch, restaurant, or site. In a word, be conservative. Build up a cash cushion if you can, to ride out the storm. Plan for a rainy day. Diversify if you can, to spread the risk. Build multiple revenue sources, not just one.

Small businesses can many times weather a recession better than large companies, since they can pivot and add new services or products more rapidly, and have lower overhead.

The main goal is to SURVIVE, not to grow. If your sales grow, consider that to be a bonus.

Note: Marketdata has published a wide variety of service and healthcare market reports and business studies. It has $99 Overviews (15-40 pp. of concise analyses) that provide due diligence, key operating ratios, trends and forecasts. See marketdataenterprises.com for available reports. John LaRosa is available for consulting.

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