Inflation vs. Recession...and Which One Economists Worry About More

Roughly 12 years ago our country was just starting to pull itself out of the Great Recession, which officially lasted from December 2007 to June 2009.  While the recession itself “lasted” less than two years, the effects were felt well into the mid 2000’s.  “The Dow Jones...began to recover in March 2009 and, four years later, in March 2013, broke its 2007 high…. Unemployment was at 5% at the end of 2007, reached a high of 10% in October 2009, and did not recover to 5% until 2015, nearly eight years after the beginning of the recession. Real median household income did not surpass its pre-recession level until 2016,” states Investopedia.  This rebound didn’t come without a generous stimulus from the U.S. Federal government.  $787 billion to be exact. 

So why are we rehashing the economic crisis of a decade ago?  Well, because it’s the most recent in our minds and we need to prepare ourselves for what could come.

Right now the U.S. is undergoing inflation, at higher than forecasted rates.  And many would argue that inflation can be worse than recession.  “Everything costs more every year, so if you’re on a fixed income, you have less and less buying power. And inflation is terrible for savings and investments: If you have $1,000 in the bank today, it buys less tomorrow and even less next month,” explains NBC News.  

Most would say that recessions can correct themselves; when people spend less, there is less demand for borrowing, and lenders naturally lower their rates to attract any loan activity they can find.  Eventually consumers, and businesses, begin to borrow again at those low rates and the economy begins to fix itself.  Inflation, on the other hand, is harder to correct, most would argue.

With inflation, rates need to increase so that consumers and businesses borrow less money.  But how high do they need to increase and what are the consequences of a higher rate?  The U.S. experienced similar inflation in the 1970’s and it wasn’t until the Fed increased rates by 20 percent that the inflation finally slowed down.  However, in doing so the financial markets took a hard hit and people on fixed incomes felt the pressure.  Does anyone remember the days when mortgage rates were 19%?  

 An L.A. Times article written in 1990 discusses the emotions, and fear, people had nearly 10 years later, “such strong convictions on the dangers of inflation are shared widely, for the country is still living with the legacy of the 1979-1982 price spiral, which lifted the consumer price index 50% and carried the prime lending rate to a peak of 21.5%....As some prices rise, producers and workers demand to be paid more to offset the increases in their costs. If those demands stick, an accelerating cycle of wage and price hikes begins.  As prices spiral, the buying power of the dollar falls, eroding the value of savings. It becomes difficult for businesses to plan spending, and for investors to determine how much interest to require for their money.”

 Are we trying to scare you by sharing this?  Definitely not.  Do we think it will be that bad?  No.  But, as a consultant, if we aren’t looking forward and researching what to prepare for, then what good are we?   

Our clients are business owners.  Their days are full, managing each aspect of their business...from trying to find talent to sourcing products, and anything in between.  Strategizing on how to prepare their businesses for economic effects is not top priority when the day-to-day necessities are rapidly coming across their desk.  Coveted is the trusted advisor looking out for them.  

Each month we spend an entire day with our business owners to focus on the big picture; whether that be a pending economic crisis, analyzing a possible acquisition or transitioning their business to their heir (or really anything else!)  We spend the next 30ish days implementing strategies with their staff, working with lenders to secure aggressive terms, forecasting the next 6 months, and more to keep that big picture in focus.  And we do this so that our business owners have peace of mind...regardless of what the economy is throwing at them.