- Noah Cracknell
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- On the Brink
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DALL-E
Are we in a recession?
Who the f*** knows.
Everywhere you look, investors and businesses are trying to figure out whether we are in a recession, heading for one, or coming out of one. Defining a recession is hard because processing all the data takes time. The NBER (National Bureau of Economic Research) defines a recession's start and end date, but economic data can lag up to 18 months – leaving everyone wondering.
By definition, a recessionary period is from peak to trough in a business cycle (see image below). It is NOT a period of high inflation. High inflation may cause the spending cycle to tighten and subsequently cause output to shrink, but high inflation alone does not necessitate a recession. A recession occurs when actual output (real GDP) declines consistently, causing a widening gap between a nation's potential output (potential GDP) vs. its actual output (real GDP).
Macroeconomics (Rudiger Dornbusch)
As a grad student studying economics, I wondered what businesses thrive during periods of high inflation and recessions. According to the greatest investor of all time, Warren Buffet, the best companies to own during an economic downturn are the ones that don't require continuous reinvestment.
Buffet added in a 2015 Berkshire shareholder meeting that "any business with heavy capital investment tends to be a poor business to be in (during) inflation, and often it's a poor business to be in generally." Building off Buffet's advice, a Vinovest article says that consumer discretionary, materials, and industrials are among the worst-performing sectors during a recession.
Which brings us to today.
It's January 2023. We are in a period of high inflation in the United States. And the rise has been fairly rapid. In 2020, the inflation rate was a mere 1.23%. The jury is still out on whether we are in a recession, per the NBER's definition, but signs are starting to point that way. In the last six months, more than 150,000 tech workers have been laid off. Most notably, companies like Alphabet, Amazon, Meta, and Microsoft – all of which are profitable with large cash reserves – have elected to cut jobs. But despite layoffs in tech, the national unemployment rate is still low (3.5% in December 2022).
Historically, a low unemployment rate is a sign of a strong economy. But if layoffs in tech trickle into other industries, the national unemployment rate may trend higher. In that case, the United State's output (real GDP) will slow, and the output gap will widen, setting the stage for a recession. But then again, I'm just speculating; nobody knows what will happen. In the meantime, here are a few industries that boom in good and bad economic times.
Despite the state of the economy, you still have to pay taxes. This means accountants rake it in at every point in the business cycle. And according to Investopedia, the demand for accounting services increases during a recession. When money is tight, people and businesses want to know all the tax benefits available to them, which also sets the stage for preneurs and creatives. Starting an industry-focused newsletter or publishing content that targets money-conscious small businesses and consumers might be the move for accountants and other financial professionals looking to spice up their careers and build a following.
Much like paying taxes, people still need to get their teeth cleaned and go to the doctor. A recession won't change that. But beyond the economic climate, many factors stress the healthcare system. Most notably, a growing sick and aging population puts immense pressure on healthcare workers. The more people there are to care for, the more doctors, nurses, and healthcare staff are needed to meet the demand. Not only is a career in healthcare stable during a recession, but in times of uncertainty, like during wars and pandemics, the demand for healthcare professionals increases.
Perhaps the most fascinating trend – at least to me – during an economic downturn is the rise of DIY (do it yourself) projects and the slowdown of DFY (done for you) projects. In periods of economic contraction, consumers and businesses look to cut costs where they can. Instead of hiring a contractor, homeowners shoot their shot at DIY home projects, and companies ask employees to wear more hats. Software developers don't just code; they do office remodels and lawn maintenance. Yes, that last sentence was a joke. But only slightly. It's true that employees wear more hats as layoffs hit and the economy contracts.
Similarly, grocery and discount stores tend to have steady sales despite economic tightening.
"For many, dining out during a recession starts looking like an extravagance. Supermarkets often see an increase in sales as people choose to cook more meals at home and even entertain their friends at home more often.
People cut back on luxuries during a recession, but that doesn't mean they never buy anything that isn't strictly necessary. There's even a tongue-in-cheek economic theory called the Lipstick Index, which argues that sales of cosmetics will always rise during bad times because they're a relatively affordable luxury.
That said, a great variety of other cheap thrills can be purchased at bargain and discount stores. People who otherwise never step into a dollar store rethink their shopping habits when a recession hits."
I'm not sure I'll buy cosmetics during an economic slowdown, but I will keep shopping at Trader Joe's. Spending $100 on one trip is virtually impossible at Trader Joe's. Even in the roughest times. Granted, I'm just providing for myself and live in a tiny NYC apartment, but you get the point.
Starting a company might not be your first idea when money is tight, but as Tim Ferris points out, "A recession is very bad for publicly traded companies, but it's the best time for startups. When you have massive layoffs, there's more competition for available jobs, which means that an entrepreneur can hire freelancers at a lower cost." If you've got an idea, and an inkling of entrepreneurial spirit, shoot your shot. What's the worst thing that could happen? It fails? Big whoop.
To reiterate, nobody knows if we're in a recession unless the NBER says so. And most people don't even know how to define a recession correctly. But if you read this entire article, you should now 😉
Keep crushing.
Cheers,
Noah Cracknell
P.S. Feel free to respond to this email and let me know what's going on in your life! I'd love to hear from you.
Before you go 📝
Earlier this week, I started my Master's program (MA in Economics) in NYC. During my studies, I plan to work or do research. I'm looking for a role based in New York City or one that can be done remotely. If you or someone you know is hiring and you think I might be a good fit, please respond directly to this email to get in touch.
Thank you for the help!
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