Intro/Outro (00:01):
Welcome to dial P for procurement, a show focused on today’s biggest spin supplier and contract management related business opportunities. Dial P investigates, the nuanced and constantly evolving boundary of the procurement supply chain divide with a broadcast of engaged executives, providers, and thought leaders give us an hour and we’ll provide you with a new perspective on supply chain value. And now it’s time to dial P for procurement.
Kelly Barner (00:31):
Does it really matter if we go into a recession in recent episodes of dial P for procurement, we’ve taken super hyped up news stories and brought them back to earth and made them more manageable. By focusing on the facts we dug into the details behind Elon, mosque’s apparently paused effort to take Twitter private. We walked back through time to understand why the baby formula shortage reached such a critical point. And we investigated the measurable sources and implications of sky high inflation, but there is one topic that is looming large over all of these it’s appearing more and more in news stories and CEOs are making news on a weekly basis for speculating. If and when it will arrive, we’re all standing in its shadow. What am I referring to the R word recession? Are we really headed for recession or is talk of it just more scare tactics trying to grab eyeballs on the latest headline and truthfully, if it is a recession that’s on the horizon, does it really matter?
Kelly Barner (01:51):
We’re going to talk about that today. Hi, there I’m Kelly Barner. Thanks for joining me for this week’s episode of dial P for procurement, part of the supply chain. Now family of shows. I’m a career procurement practitioner with a love for business news, and most of all good ideas, no matter where they come from. In addition to video interviews and live streams, I’ll join you every Thursday to share my point of view on a current news story that presents an interesting twist for business leaders or a new way of looking at a common challenge, all with a heavy dose of common sense. Of course, before I dig back into this week’s topic, we’re building out dial P’s independent following. So no matter where you encountered this podcast, let’s engage. Give us a review click. Like if you’re listening in a podcast app, give us a few stars.
Kelly Barner (02:48):
Thank you in advance for being an active part of our listening community. So let’s start with the basics. What is the technical definition of a recession? The most common requirement that people look to is two consecutive quarters of declining GDP. Now that definition actually was established in 1974 by economist Juli SHK. He was the commissioner of labor statistics in the Nixon administration. So GDP a gross domestic product is an inflation adjusted value of the goods and services produced in United States. In our case. Now, the reason it’s ingested for inflation is to make sure that the rising cost of goods and services is not misinterpreted as increased production, but GDP. Isn’t the only thing that factors in. We also look at rising levels of unemployment falling, retail sales, and contracting measures of income and manufacturing, supply chain disruptions, maybe the other thing that’s interesting about recession for all the time we spend dreading them is that they’re very common.
Kelly Barner (04:06):
There have been a dozen recessions in the last 75 years. And in fact, we’ve had four in the last 30. So if we count backwards from most recent and go through these last four, there was the COVID 19 recession. It actually only lasted two months. It was the shortest recession in us history. Then there’s what we often refer to as the great recession that was from December of 2007 to June of 2009. It was caused in part by a bubble that burst in the real estate market. And it lasted 18 months, almost double the length of other recent us recessions there’s of course, the very popular and well known.com recession, which happened in 2001. We associate that with the tech bubble crash, as well as accounting scandals at companies like Enron, which of course then was capped off by the market being closed for a while in the wake of the nine 11 terrorist attacks, it was a brief recession and the economy fairly quickly bounced back.
Kelly Barner (05:11):
And then the last one, as we count back through the last 30 years was the Gulf war recession, which was from July of 1990 to March of 1991. And this recession was caused by spiking oil prices during the first Gulf war. But does someone get to make that decision believe it or not? Yes. There’s an organization called the business cycle dating committee at the national bureau of economic research or N B E R. They are the ones that officially make the designation, make the announcement, decide that we are in a recession. But the funny thing about the importance of also waiting for them to make this call is that there’s such a lag effect, right? We’re watching things like GDP. We’re watching unemployment. It takes time for these numbers to come out. Now, normal, monthly economic numbers are delayed by about a month. And then they’re usually revised in, in subsequent weeks or months.
Kelly Barner (06:10):
But our definition for recession is based on a quarterly GDP number. So the lag is even longer now because of that, companies in particular will try to anticipate whether a recession is coming because then they can start to act as though they’re going into slower economic conditions and protect themselves. Everybody is watching a whole host of economic indicators as well as the stock market, which briefly entered a bear market last week, which means it took a 20% drop in value from its most recent high point. Now I have the wall street journal app on my phone and iPad, and I tend to keep the iPad near me on my desk. And every time there’s a little update, the whole screen lights up and it gives me the little news breaking news panel from the wall street journal for the last week or so. It’s been lighting up all day, the stock market’s up the stock market, down the stock market up the stock markets down.
Kelly Barner (07:06):
And part of what’s being worked out in that are real time differences in people’s perceptions of opportunity and their willingness to invest. So that doesn’t have the lag of the recession that we’re waiting for. Now, where are we right now with GDP in the first quarter of the year, GDP decreased by 1.4%. Now, usually on a quarterly basis, they would look for it to grow at about 2%, but we don’t get our next update until July 28th. That’s when we will get what they call the advanced estimate for Q2 GDP. And then there will be of course, subsequent revisions and, and adjustments. But if we’ve already got one down quarter, if we get a second down quarter by that technical definition, we are in a recession. So we’re waiting to find out now back to what retailers are doing. If in fact that second quarter GDP comes in down, we will have been in recession for seven to eight months before it’s officially called.
Kelly Barner (08:13):
So you can certainly understand why they’re trying to anticipate and get ahead of it. Although GDP is the measure and the primary determining factor of recession inflation is very closely linked. And you might actually say that inflation can indirectly cause recession partially because of what the federal reserve ends up doing in response to inflation. Now, if you happened to miss it, go back and listen to dial P episode 18. We asked if inflation expectations were self-fulfilling prophecy. That was back in April. And we talked about the options that the federal reserve has in changing interest rates in order to try to slow down and pull back inflation. So is it possible that the federal reserve can cause a recession in order to save us from inflation? So, as I had mentioned in that episode, the fed will raise interest rates. And they’ve said, they’re going to do it about a half a point at a time through the rest of the year in order to curb demand and make it more expensive for consumers and companies to spend.
Kelly Barner (09:22):
They’re trying to slow the economy down. Unfortunately, if there are too many changes or a strange way of looking at it, if it works too well, they’re gonna slow us right down to the point of recession. Now, one of the other interesting things here is that we think about things like recession and inflation as being general industry economic topics. We think about businesses and companies, but they’re both driven in large part by consumers. So 70% of the us GDP is derived from consumer and household spending, not B2B or corporate spending. So just like the CPI or consumer price index, which is used to measure changes in inflation. That’s consumer driven. So is recession because of that connection to consumer driven GDP. Now companies like target and Macy’s Walmart and Kohl’s consumer facing typical goods companies like this. They were already expecting consumers to start to pull back their spending.
Kelly Barner (10:29):
We’ve all been buying things for the last couple of years. And the economy was generally expected to be moving people towards paying for experiences. They want services, they want dinners, people want to travel. Now what they weren’t expecting was for the shift to be as sudden and dramatic as it was. So now they’re trying to recover from that shift and also reposition themselves to do okay if we do in fact end up in a recession. So we’ve talked about what makes recession and we’ve talked about who declares recession. The next questions are, if it’s coming when and how bad will it be. So to get the answers to those questions, we have to suit ourselves up for the battle of the economists. Everybody’s got a different point of view on this. In the average year, the probability of recession is 15% and banks like Goldman Sachs, Deutsche bank, UBS, they’re all coming out and writing letters.
Kelly Barner (11:29):
They have banks of economists and they’re writing letters to investors to let them know what their read is on the market. And what do they think is going to happen? Goldman Sachs has said that they believe the likelihood of recession in the next two years is 35%. So that’s considerably higher than that average likelihood of 15%. They said, quote, we do not need a recession, but probably do need growth to slow to a somewhat below potential pace, a path that raises recession risk. They certainly don’t wanna sound like they’re cheering for recession. Now in a slightly more doer opinion expressed at the end of April Deutsche, bank’s economists wrote to their investors that they expect a major recession. They said history shows the fed has never been able to correct even smaller overshoots of inflation and employment without pushing the economy into a significant recession.
Kelly Barner (12:26):
And that’s certainly one of the challenges that Jerome Powell and his team face today. We’re looking at the highest inflation rates in four decades, and he only has so many levers to be able to address that you overshoot or miss the timing a little bit. We’re definitely heading for a recession. Mark Hele is the chief investment officer at UBS global wealth management. He’s more optimistic. He expects inflation to ease naturally allowing the fed to step back and maybe not stir the pot quite so much. Maybe we can just let the system alone and let it work itself out. But when we go back and we look to see what’s the sentiment among CEOs, the conference board recently surveyed them. And 60% of the CEOs they surveyed said that they expected the Fed’s Warren inflation to eventually trigger recession. So they’re starting to change the way their companies operate.
Kelly Barner (13:21):
This is affecting hiring and investment decisions. Almost 70% of them think it’s coming. So if we do end up in recession, how do we get out? The biggest thing is that the co the economy generally will start to grow again. And just like there was a lag when we talked about having it be declared that you’re in recession versus actually being in one recovery is very much the same. At some point companies and individual consumers are going to take a look around and see that the money they have saved and the opportunities they’re being presented with given whatever their personal risk tolerance level is mean that an opportunity is worth taking. So that collective mindset shift has to happen long before it starts taking effect in the economy. And we can declare that we’re out now, some of the past recessions that we talked about in 2009, it was government stimulus that got us out.
Kelly Barner (14:18):
That’s unlikely to be the case this time because it’s government stimulus that has enlarged part led to the inflation that we’re currently dealing with. In 2001, it was growth in the housing sector that brought the economy back into growth mode. And the easiest, one of all that short little COVID recession business is reopened. That was all it took for us to be back in growth mode. Now we’ve talked about recession predominantly from the perspective of being inside the us, but recession is also a global dynamic it’s possible for multiple economies. In fact, the world economy to be in recession at the same time in past instances, perhaps China’s economy hasn’t been affected while the us is, was they were able to invest and end up being the engine of growth to pull us out of recession. That is highly unlikely to happen this time. Not only are they still dealing with manufacturing, interruptions and port closures and constraints due to their zero COVID policy, they simply, their economy is not growing as much as it would need to be to help the us get out, nor can we necessarily look to Europe for help.
Kelly Barner (15:31):
They’re being hit far more directly from an economic standpoint by Russia’s war in Ukraine, around both fuel and energy and commodity prices. So they’re not going to be the engine of growth that pulls us out now to a certain extent. And, and this is the source of the, the provocative question that I’ve titled this week’s episode with. Does it really matter if we officially go into recession? I mean, I suppose it matters for the sake of record keeping, right? We want it written down on paper. Are we officially in recession, but as we’ve seen with inflation, people’s concerns about, and mindset towards opportunity can in and of itself drive downturn. If people perceive that their salary doesn’t go, as far as they thought it would, or they start to perceive that common staples like groceries and gas for their cars and home heating oil are significantly more expensive.
Kelly Barner (16:30):
Does it really matter to them? If we’re officially declared to be in a recession, it’s still going to start to change their behaviors in such a way that in and of itself, it’s collectively going to slow the growth of the economy, businesses and consumers make these decisions. Very similarly, it’s all about how they perceive the ROI of any spending or investment decision and their relative risk value. Now, a couple of weeks ago, I covered the baby formula shortage. And it’s funny because I’ve remained hooked to this story. So I keep reading all the new pieces about it. And there was a really funny story in a wall street journal article about the baby formula, this shortage this weekend that I think ties to what we’re talking about, but the connection between inflation and recession. So the author of the story says the infant formula shortage took me back to an illuminating incident during a fire safety training session.
Kelly Barner (17:27):
I attended decades ago, the trainer was showing us how to save a person engulfed by flames. One of the participants objected to using a fire extinguisher on a human being. Aren’t those chemicals dangerous. You are on fire. The instructor replied. So to me, that’s point taken. If you already feel like your money, doesn’t go as far as it should. How much does it actually matter if a recession is declared? And from the same perspective, if we’re already suffering under inflation, does it really help us if we trigger a recession in order to fix it? I also wanted to know, is there any possibility that there’s an upside to recession now, admittedly, all of these upsides also have downsides, but there are a few sort of naturally beneficial over the long term things that can result from recession. So if you have a poorly run company, that’s just scraping itself by, they are in all likelihood going to shrink, go out of business.
Kelly Barner (18:35):
Now that’s not great for their customers, their community, their employees, but it does create an opportunity for other companies that would’ve otherwise competed with them to increase their market share. So it rewards financially efficient, healthy companies. The same thing ends up happening for investors. If you’re an investor that’s overly dependent upon carrying debt in order to manage your investments, you are going to learn a very hard lesson. If we go into recession businesses and people who opt to save and prepare for the future are rewarded. And so they are able to take advantage of opportunities that aren’t present to companies and people who don’t have cash on hand. And it’s that spark of opportunity. That’s that switch flip? I was talking about earlier when people who’ve had the wisdom and the ability to save, see an opportunity and make the decision that the time has come to seize it.
Kelly Barner (19:33):
There are also some companies in industries that will make up better than others. Discount stores like dollar general will do better. Consumers will move off of national brands and try private label or more cost effective brands. People are also more likely to repair cars and add on to homes than they are to move or buy new cars. And of course, if you happen to work in procurement, like I do it both keeps you busy and proves to the company that you work for. Just how valuable you are. There’s always an upside. If you’re in procurement, that’s my point of view. Anyway, my last piece of advice is as with so many of the other stories we’ve covered, keep in mind that the headlines and the hype don’t necessarily signal what’s going to happen and they certainly shouldn’t motivate your decisions. Always remember to go back to the facts, understand the fundamentals, track the numbers before you make a big choice that is as critical with inflation and recession as it is with supply chain, disruption, get to the facts. Thank you for listening to this audio episode of dial P for procurement, but please don’t just listen, join the conversation and let me know what you think about a recession or any other topic. Let’s all work together to learn and figure out the best solution until next time. This is Kelly Barner for dial P for procurement on supply chain. Now have a great rest of your day.
Intro/Outro (21:12):
Thank you for joining us for this episode of dial P for procurement and for being an active part of the supply chain. Now community, please check out all of our shows and events@supplychainnow.com. Make sure you follow dial P four procurement on LinkedIn, Twitter, and Facebook to catch all the latest programming details. We’ll see you soon for the next episode of dial P four procurement.
