Historical data indicate the next recession could strike soon

As anyone who worked in the staffing industry through the Great Recession is painfully aware, the industry gets crushed in recessions. It gets obliterated.From December 2007 to August 2009,temporary help employment contracted by 32%. The 2001 recession, despite being relatively mild and short-lived,also created real hardship in the staffing industry, as temporary help employment contracted by 13% in only eight months.

When will the next recession hit? It is extremely difficult to predict a recession in advance, but we can take a look at historical data to give us a better idea.Since 1900, the US has been through 23recessions. The expansionary periods between recessions have historically been short-lived. Since 1900, the average expansionary period lasted 46 months,just shy of four years. However, when looking at more recent decades, the picture improves. If data from before1961 is removed, the average expansion increases to 71 months. As a side note,this reduction in business cycle volatility was so pronounced that some economists began referring to the period after the mid-1980s as “The Great Moderation,”as recessions became less frequent and less severe. Needless to say, the Great Recession of 2008-2009 reduced much of this optimism, and reminded the American public recessions are not a relic of the past.

Our current period of economic expansion has lasted 69 months, just shy of the 71-month average since the early 1960s. For perspective, if the US economy continues to grow without being interrupted by a recession for another four years and four months, it would be the longest period of uninterrupted economic expansion on record, a record stretching back to before the Civil War. The record for the second-longest period of economic expansion is more attainable, and would be exceeded in just over three years. While I am pleased that the economy seems to have recovered from the last recession, these two facts give me pause, and call into question what part of the business cycle we are currently in.

Again, forecasting the timing of recessions with any degree of precision is impossible, and there are factors that might make this period of economic expansion different than others. First,the severity of the past recession might influence the length of this current expansion. The economy has been expanding since 2009, but it can hardly be said that the economy was thriving.According to some economic theories,this could be a mitigating factor— the years of relatively slow growth after the recession may have prevented the economy from reaching a point of over investment and excess capacity.Additionally, the recent boom in domestically produced oil and natural gas is a significant economic event, and is boosting GDP growth and consumer buying power. On the other hand, there are plenty of well-known factors that could harm the US economy, including economic weakness in Europe and a slowing Chinese economy.

So, recessions crush the staffing industry and have been a recurring feature of the US economy. What can you do to prepare? While it is extremely difficult to truly recession-proof your business in the staffing industry, there are ways to evaluate your risk. To help, we created the US Volatility Tool, which can be found on our website. Using employment data from the Bureau of LaborStatistics, this tool analyzes the more than 900 US industries, and ranks them by employment volatility over time.Using this tool, you can identify industries that maintained steady employment over the years, and you can better understand your company’s exposure to industries that experienced severe employment fluctuations. The tool also plots historical employment data graphically,so you can see how different industries fared back to the 1950s.

Additionally, when evaluating your company’s exposure to recessions,there are a few broad principles to keep in mind. First, if your company staffs manufacturers, ask: Do the companies we serve make expensive, durable goods, or do they make inexpensive nondurable goods? Historically, companies that produce expensive durable goods(such as automobiles and furniture) fare poorly during recessions as firms and individuals take defensive positions and delay nonessential purchases. Producers of non-durable goods (especially of inexpensive,essential products) typically fare much better during recessions.

Second, when looking at historical data, construction is perhaps the hardest-hit sector of the US economy. As businesses fold, they leave behind empty commercial buildings, often leading to an excess supply of commercial real estate. Lending tightens, confidence wanes and commercial building slows.And as we saw in the last recession,economic contraction can cause a glut in the housing supply through foreclosure and reduced demand, especially after a period of extraordinary housing growth.People tend to avoid purchasing expensive,durable goods during recessions,and building construction can be delayed or cancelled. Staffing firms seeking to recession-proof their businesses may choose to limit their exposure to the construction industry and limit exposure to durable goods and luxury goods.Firms may consider industries such as hospitals and healthcare; food production and manufacturing; petroleum and gas production and refining; scientific research; and education, as these industries have traditionally weathered recessionary periods well. Additionally,government contracts can (sometimes)serve as a safe haven during recessions. A final strategy that should not go unmentioned is use of outplacement. As an inherently counter-cyclical industry,outplacement can be of some use to staffing firms seeking to add stability.

It is impossible to know exactly when the next recession will strike or how severe the next recession will be, but if we do not have one within the next four or five years, we will be making history.While staffing firms can’t predict recessions,they can be prepared by maintaining a healthy mix of customers in the right industries and avoiding excessive debt and leverage.