Is Cost-Cutting a Sign We’re Heading for a Recession?

Tech professionals are reporting cost-cutting in their organizations. Is it a sign that a recession is imminent?

A survey this month by Blind, the anonymous community app for the workplace, found that technology professionals are observing cost-cutting in their workplaces. The majority of the 2,601 professionals responding to the survey between August 14 and August 16, 2019, said cost-cutting is occurring in their organizations. Of the respondents in the software industry, 65.77 percent reported that their employers are tightening their belts. Blind added that its users responding to the survey also reported hiring freezes, cutbacks on bonuses and perks, and more modest raises.

What’s Behind the Cutbacks?

Although companies can choose to cut costs for a number of reasons, businesses may be positioning themselves more conservatively as predictions continue that we’re heading for a recession.

Bankrate explains six indicators that you can use to watch for signs that there may be a downturn in the economy:

  1. Yield curve: Yield is the interest rate on a bond or Treasury. The yield curve usually has a positive slope, but when investors demand a higher yield over a shorter period, the curve inverts. Yield curve inversions have indicated recessions over the past 50 years.
  2. Confidence indexes: Consumer confidence is another indicator of a recession. In the Bankrate blog, Peter Donisanu, investment strategy analyst and Wells Fargo Investment Institute, says, “Sometimes a recession could be self-fulfilling. You build up so much pessimism about the economy that activity stops. When you have businesses and consumers who feel less confident about the future, they have a lower propensity to spend. That’s when we start to see a contraction in growth.”
  3. Employment data: The unemployment rate is an indicator, but analysts also look at hours worked and temporary help, which could show that businesses have a more conservative outlook.
  4. The Federal Reserve Bank of New York’s recession probability model: The model is based on the difference between 10-year and 3-month Treasury yields and gives a percent chance that a recession will occur in the next 12 months. Analysts consider 30 percent the threshold.
  5. Leading Economic Index (LEI): This index is based on 10 datasets that predict global economy. During a recession there is no positive year-over-year change.
  6. Gross domestic product: This statistic shows whether or not the economy is growing.

So, what do economists see in the signs? A survey by the National Association for Business Economics found that 98 percent of its members believe a recession will occur after 2019, but they’re divided on whether it will happen in 2020 or 2021.

Is Cost-Cutting at Your Organization Good News or Bad News?

The U.S. Small Business Administration offers guidance for operating during an economic downturn, including maintaining a strong cash flow, building up capital reserves, and finding ways to be a leaner, more efficient operation. It’s also a time to identify need from “nice-to-haves,” like Uber deciding to give employees stickers to mark their work anniversaries instead of helium balloons — which could save the company more than $200,000 at its San Francisco location each year.

The SBA stresses that a conservative strategy when it comes to cash flow should not carry over into marketing and sales. A recession is a time to be more aggressive and build market share — perhaps former customers of your competitors who are less able to adapt to the change in the economy.

The cost-cutting that tech professionals are seeing at their companies may be efforts to prepare for changes in the economy in the next few years. Adjustments now could enable a business to thrive, whenever the next recession occurs. 

 


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Mike Monocello
The former owner of a software development company and having more than a decade of experience writing for B2B IT solution providers, Mike is co-founder of DevPro Journal.