Each passing month marks a new record of sustained economic growth in the United States. This rally is the longest in the history of the country, surpassing the prior 120-month record set from March 1991 to March 2001.
The current climb has boosted GDP with 25% cumulative growth while unemployment has fallen drastically. Issues like cost-cutting, workforce downsizing and economic recession are relics amid a strong market landscape of competitive hiring and talent.
Looking around today, it is tempting to get swept away by the optimistic upward pull. But for many, especially those still haunted by the 2008 crisis, it feels like balancing on a pinnacle, inevitably reminding us that what goes up must come down.
Historical unemployment trends in the U.S. are characterized by slow downward slopes during periods of economic expansions, with the lowest points occurring 12 months before a recession. While some countries are able to maintain steady levels of low unemployment over longer periods of time, this phenomenon has never been seen in the U.S., suggesting that unsustainable economic imbalances are created during periods of growth in this country.
Isolating just the impact of low unemployment on the economy, it is interesting to note the possibility for unemployment to be too low. Economists suggest that an unemployment rate of about 5% is characteristic of an economy at full capacity. With current rates hovering closer to 3%, an output gap, or slack, starts to exist in the labor market. This inefficiency generates upward pressure on wage inflation, indicating a slowdown in economic growth and dented profits. Faced with this possibility, policymakers have the dilemma to either allow eventual slowdown or raise interest rates and cause an increase in unemployment.
Further contributing to the towering uncertainty of the future U.S. economy is the highly charged and polarizing presidential election we are heading into. Only five incumbent presidents have ever lost a re-election, and to varying extent these failed campaigns each took place during economic crises like a stock market crash or recession. Trump is running on a platform boasting a booming economy with the longest rally of growth in the history of the U.S., which seems to put the odds firmly in his favor. However, only 34% of voters say that this election will be about the economy, which may give a significant boost to the opposition.
If one of the Democratic frontrunners does oust Trump in the general election, the federal corporate income tax rate would likely move back up toward 35% from its current 21%, which would be a sizeable blow to the market. According to Goldman Sachs, this would reduce S&P 500 earnings in 2021 by a whopping 11%.
In the recently published Duke CFO Global Business survey, it was found that 52% of U.S. CFOs believe the country will be in recession by the fourth quarter of 2020 and 76% believe that a recession will have begun by the middle of 2021. In fact, the study also found that most companies are actively taking steps to prepare for a recession: 59% are strengthening their balance sheets, 58% are cutting costs, 29% are increasing liquidity and 31% are scaling back or delaying investment.
These findings are staggering and perhaps alarming for those who have been assuming continued growth and prosperity. Competition for talented employees is still fiercely present in the labor market. The narrative many of us are accustomed to from our employer, prospective employer, or just generally, is that things are on the up-and-up. Talk of contingency plans is mute and presumed unnecessary amid the efforts of improving benefits to lure top talent. These findings, however, tell a much different story.
Contingency planning for personnel and downsizing strategies are critical activities and deserve attention now, before the fire alarm is pulled. Organizations across the board are carrying heavy payroll obligations in the wake of hiring frenzies. Should profits begin to decline, getting back to a fighting weight as quickly as possible could be key to staying in business. Just like every building has a fire escape plan, having a strategy in place to dial down a workforce when necessary is critical in case of an emergency. Planning ahead also has the advantage of having time to evaluate and weigh options and create a considered, people-focused approach.
If there is something to take away from all of this, it’s to recognize that these times are plagued by uncertainty. Economic growth might continue chugging along, or we could be on the brink of another downturn. Unemployment is low, but that has positive as well as negative implications, and we’re heading toward an election with much at stake. Planning and preparedness are essential for forward-thinking companies with longevity goals, and business decisions are being made to protect against the future, even if they are only whispers for now.
The best advice that anyone could give at this point is to expect the worst and hope for the best.