A Recession the Cure for the Economy?

A Recession the Cure for the Economy?

Over the course of the last several months, I’ve had numerous conversations with clients, friends, family members, business associates and the like about the state of our economy. Most believe that we’re in a slow growth economic environment.

And they’re correct. The latest GDP reading showed a headline number of 3.2%. But after you subtract out net exports and inventory, which were likely due to companies front-running tariffs, the REAL number was closer to 1.5%.

So how can we cure this slow growth economy? How can we realize higher GDP growth over the long run? Dare I say it? A recession.

I know…it’s contrarian and controversial! Recessions aren’t fun…they’re painful. But they ARE supposed to happen every few years. In an economic cycle, the economy expands…then contracts.

Before you say I’m crazy, hear me out. First off, I don’t have a PhD in Economics. I’m not pretending to be the smartest guy in the room. And I’d consider myself more of a “stock guy” than a “macro guy”. But, I do own a business. I have dozens of clients who own privately held businesses, as well. And I’m a member of Entrepreneur’s Organization (EO) so I’m interacting with other business owners across the country regularly.

Small businesses are the lifeblood of our economy and the owners are typically on the front line when it comes to noticing shifts in the broad economy. In my conversations with other successful business owners, here are the issues they’re bringing up:

1. Talent. The low unemployment rate isn’t good for small businesses. Pretty much everyone that wants a job already has one. One client mentioned he had a C+ employee get poached by a competitor for A- money.
2. Productivity. The talent they do have is less productive. More employees are asking for benefits like “work from home” privileges while producing lesser results.
3. Growth. Without having the right talent, these companies are unable to fully execute on their growth plans. That’s causing them to execute on just a portion of their plan while sacrificing growth.
4. Margins. More and more of these business owners find themselves giving away something for free (or close to it) that they would have charged for in the past. Why? Because the fly-by-night competitors operating out of their moms’ basements are competing strictly on price since they can’t produce quality. That’s causing margin compression across the board.

All these problems have occurred because this economic cycle has been artificially prolonged through a combination of fiscal and monetary stimulus. Normally, you’d expect a recession every 4 years. It’s been 10 years since the Great Recession. This abundance of stimulus has given a lifeline to inefficient businesses. These are businesses that are experiencing little to no growth or might even be in an outright decline. They don’t have business strategies that they’re able to execute on to grow. Their leadership team is weak. To put it simply, they don’t have what it takes to be successful.

Here’s how inefficient businesses hurt efficient businesses:

1. They “steal” good employees from efficient businesses. The overall economy would grow much faster if all these employees were working for high-growth companies rather than businesses on the brink of disaster. Think about it. There’s a limited supply of quality employees. As an economy, we want the best employees working with high quality companies to drive economic growth. Faster economic growth creates more jobs in the future.
2. They inhibit the top line growth of efficient businesses. Without the right talent in place to execute on their strategy, businesses are forced to dial down their growth plans.
3. They kill the margins of efficient businesses. To try to make themselves relevant, they give away products and services for free. More often than not, their deliverable is far inferior to what would be offered by an efficient business. So nobody benefits. Businesses don’t make money. And the consumer is unhappy with their deliverable.

Okay…so what does a recession have to do with any of this?

Recessions eliminate the excess. When the economy gets ugly, these inefficient businesses likely wouldn’t survive. They’d get acquired by a stronger competitor or they might just shut the doors. And when that happens, there’s a migration of talent. The employees that they’re suffocating under their watch would transition to efficient businesses that are executing on high growth strategies.

What are we left with once the dust settles? A stronger economy, businesses that are firing on all cylinders, and employees who enjoy their jobs because they’re being encouraged and incentivized to realize their full potential.

Yes, it would be painful in the short run. But if we’re wondering what can help to break us through this muddle-through economy, it might just be allowing the economic cycle to run its full course.