The next recession is coming. Here’s what to do now

2020-01-14
Matthew Salois, PhD

The ‘R’ word is an economic inevitability, but that doesn’t mean you should panic. Take these five steps to prepare your veterinary practice for the next downturn.

There’s no crystal ball to tell us when the next recession will occur or how severe it will be. But economists do rely on a set of key economic indicators to help gauge the performance of the economy and what direction it’s heading in. These key indicators—including unemployment, consumer sentiment and others—suggest the economy remains healthy as I write this in late October. But we do know there will be another recession eventually. They’re a normal part of the economic cycle.

Whether the next downturn starts in months or years, there’s no reason to panic. But there’s always good reason to prepare. Forward-thinking business owners can actually make recessions work in their favor.

Five ways to shore up your practice now

The actions you take in a strong economy can set you up to reap dividends when a downturn arrives. Here are important steps you can take now to safeguard both your practice and your personal finances once a recession hits.

1. Reduce the debt on your books. In a recession, you’ll have lower sales and less available cash. That calls for deft financial management. If your business is heavily in debt, you may be more vulnerable. Do what you can to reduce your debt burden now by consolidating loans or refinancing at a lower interest rate. Studies have shown that many businesses that failed during the Great Recession had much higher debt-to-asset ratios than those that survived and thrived.

2. Strengthen and build your business. Now is the time to be aggressive in seeking new clients and building stronger relationships with current ones. It can be tempting to take it easy when times are good, but the exact opposite is the wiser course. Building during boom times helps insulate against a recession. Work extra hard to help existing clients understand the importance of compliance with preventive care guidelines now, when the healthy economy means they’re more likely to prioritize veterinary care. Similarly, now is not the time to cut back on work hours if you can avoid it.

3. Invest in digital technology. It’s tempting to think of battening down the hatches during uncertain economic times, but improving your technology now can put you in a better position to manage uncertainty. If you’ve been considering experimenting with telemedicine, a client-facing app, or texting or analytics platforms, committing now can put you in a better position during the inevitable downturn.

4. Examine your decision-making process. In the last recession, companies that decentralized decision-making fared better than those that clung to authority. Leaders who passed authority further down the chain of command found that their employees remained more committed and involved. Although it might make you feel uneasy, work on delegating various elements of your practice oversight. At the very least, seek more input from employees at all levels.

5. Avoid layoffs if possible, even when the recession hits. Look beyond headcount reduction to strengthen your practice’s finances. Layoffs hurt productivity and morale. If you need to cut payroll costs, consider alternatives such as furloughs, reduced hours, or reduction or elimination of performance pay. Above all, be transparent with staff in advance about your need to reduce expenses. You might be amazed by the ideas they come up with, given the chance.

Resources to bolster your practice against recession

The AVMA has numerous tools to help you strengthen your practice before and during a recession. These include a market share calculator, marketing and social media materials, human resources materials covering everything from team building to payroll, and even a purchasing tool (AVMA Direct Connect) that includes real-time price comparisons for consumer pharmacies.

The newly redesigned AVMA website includes a dedicated practice management section and a personal finance section, too. Visit avma.org/PracticeManagement and avma.org/PersonalFinance.

The AVMA also has a growing library of business and financial CE on AVMA Axon. Check the financial health section at Axon for timely guidance on both practice and personal finances, including courses we offered at October’s AVMA Economic Summit.

If you’re an AVMA member, please don’t hesitate to reach out to me or any member of our economics team with questions. We have a huge variety of economic and practice data, and we love nothing more than to share it.

Economic indicators to monitor

AVMA’s economists recommend that veterinarians get in the habit of tracking four key economic indicators for signs of recession. You can do this very quickly on a daily basis. Just five to 10 minutes with your morning coffee will keep you informed.

1. Unemployment rate. Recently, the U.S. unemployment rate has been hovering near its 50-year low, which should be reassuring. What matters is change over time. If the unemployment rate rises quickly, that almost guarantees a recession has begun.

2. Yield curve inversion. Long-term investments normally earn higher interest than short-term. In a yield curve inversion, this is reversed. For example, a three-month U.S. Treasury bond may pay a higher rate of return than a 10-year bond. This means investors have low confidence in the economy. A yield curve inversion usually shows up well in advance of a recession, so there’s no need to panic. It can take as long as two years for a recession to develop after this happens.

3. University of Michigan Index of Consumer Sentiment. Consumer spending drives our economy. This monthly index tracks how confident consumers are that the economy is healthy. Look for long-term changes rather than one-month fluctuations—for example, a 15% year-over-year drop lasting for several months

4. Manufacturing sector Purchasing Managers Index (PMI). Each month, the Institute for Supply Management surveys its members, then aggregates the data on a scale of 1 to 100. If the PMI is 50 or above, manufacturing expanded that month. Below 50 indicates that the sector contracted. Manufacturing no longer drives the U.S. economy, so a dip in the PMI is not as significant as it used to be. Steep downturns are a sign of trouble, but not a guarantee that recession has arrived.

Remember: Recessions are normal, so don’t overreact to either positive or negative financial news. Stay informed, but don’t dwell on the negative. A relentless focus on streamlining your practice and achieving your goals is the best way to weather any downturn.

Matthew Salois, PhD, is chief economist and director of the Veterinary Economics Division at the AVMA.