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Is a Recession Imminent?

If Federal Reserve Chairman Powell is willing to strangle the economy to ensure inflation stays below 2%, and follows through with rate hikes next year, it is extremely likely the Fed will push the economy into a recession. Don't panic, but be prepared.

On December 19, Federal Reserve Chairman Jerome Powell announced an expected quarter point interest rate rise and plans for two more rate hikes in 2019. Will the Fed’s actions cause a recession?

Powell seems to believe inflation is rising despite a global slowdown, trade war between the world’s two largest economies, GDP forecast cut by Powell’s own Federal Reserve Bank, collapse in the stock market (the worst December performance since the Great Depression), and a slowdown in housing, construction, oil & gas prices, manufacturing, autos, and Christmas retail sales.  To tame perceived inflation, Powell is 1. Raising short term interest rates and, 2. Reversing the quantitative easing done by his predecessor by tightening (a “balance sheet run off”). 

Rising interest rates have a direct impact on housing and auto sales by making financed purchases more expensive.  Tightening the money supply makes money more expensive, which is reflected in the strong dollar, hurting exports and manufacturing.

Despite all of the signs that the economy is slowing Powell is still willing to strangle the economy to ensure inflation stays below 2%. If he follows through with rate hikes next year, it is extremely likely the Fed will push the economy into a recession. In fact, most post World War II recessions were caused by excessive tightening from the Federal Reserve. In light of the threat posed by the Fed, here are eight actions you should follow.

Don’t Panic
Prepare, but don’t act prematurely.  Though the odds are against it, it is possible that Powell’s Fed will lead us to a soft landing.  As Calvin Coolidge said, “Never go out to meet trouble. If you just sit still, nine cases out of ten, someone will intercept it before it reaches you.” 

So while you should hope for continued growth, decide in advance what you will do if the economy falters.  Advance planning reducing the potential for panic.  Panic is not a strategy.  Panic is panic.  Plan because it is easy to panic and hard to act rationally when everything is blowing up around you.

Post World War II recessions have averaged 10-1/2 months.  In the deepest recession the economy shrank five percent.  Can you hang on for a year?  Can you overcome a five percent reduction in economic activity?  All it takes for most contractors to overcome a five percent economic headwind is sheer willpower, combined with a willingness to work a little harder.  But, there’s so much more that can be done.

Refuse to Participate
The biggest single factor affecting your performance in a recession is your attitude. Get your head straight. You can not only overcome a recession, you can prosper. When a recession hits, simply refuse to participate. Decide. It really is that simple.

Of course, it also helps if you follow the sage wisdom of Peter Principle author, Laurence Peter who said:

Early to bed

Early to rise

Work like hell

And advertise.

Concentrate Your Marketing
Your marketing needs to be more tactical in a recession.  Concentrate your marketing.  First, target existing customers.  Based on past behavior, your existing customers are prone to buy from you anyway.

Second, select key neighborhoods and focus on them.  If possible, find tract developments nearing the start of their first replacement cycle.  In these neighborhoods, you can expect a greater incidence of repair work and ultimately, more change outs.

Raise Prices Now
The time to raise prices is now.  Take a hard look at your costs and boost prices, building in room for discounting.  During tough economic times, people look for bargains and discounts.  Position yourself to be able to offer promotions, bundles, and discounts without killing your margins.

Line Up Financing and Sell on Payments
If you are not already selling replacements on payments, start.  Study auto company pricing.  Since a 3-ton air conditioning system is now the price of a good used car you should make it as easy to buy as the car companies do.  This means setting up accounts with multiple financing companies so you can try a second company if the first turns you down.  Finance systems over as many months as possible to reduce the payment as much as possible and sell the payment.  Offering a new system for $117/month over seven years is often more palatable than $8,000 up front.

Make sure you take note of homes where repairs of old systems were made.  When the downturn ends and the economy is surging, return to these houses and suggest replacing their old equipment before the next major breakdown.

Gear Up For Service
When money is tight and fear is in the air, consumers will try and avoid major purchases.  This means an uptick in repair work.  Make sure you are getting the margins you need.  Make sure you stock each truck and incent each tech to sell add-ons to boost average tickets.

Fill the Void Left by the Competition
Think of a recession as running into the wind. With more effort, you can run just as fast as you ran without the wind. Your competitors start dropping out. Faced with the need for greater effort, some slow down and walk. Others take a seat. By maintaining your pace, you race ahead. Then, when the wind turns and is at your back, it feels like you are flying along and you’re too far ahead of the competition for them to ever catch up.

Ironically, most contractors cut back on their marketing, advertising, and business investment at the very moment it’s needed most.  This further magnifies the contractors who step up.  They stand out more because the competition is going turtle and disappearing.  You cannot save your way to prosperity.

Join a Contractor Alliance
It is imperative that you join a contractor alliance when things get tough.  It’s not because the people running the alliances are smarter or savvier.  From personal experience, I can attest that they are not.  However, every alliance does have contractors who are smart and savvy.  Banded together, their collective intelligence and insight is brilliant.  If you pay attention to the contractors in an alliance you will avoid mistakes other members have made and you will exploit opportunities other members spot.  This is why the contractors in alliances outperform the industry.

If performance improvement is not enough, most alliances operate buying groups.  Not only do the buying groups save you money on purchases, but the vendors in the groups offer products and services you need and are vetted.  For example, if you need a financing resource, the alliances have them and the finance companies are set up to work with contractors just like you.

The entry alliance for thousands of contractors is the Service Roundtable.  At only $50 a month, the Service Roundtable offers the industry’s largest library of downloadable resources for contractors, including consumer newsletters, service agreements, pricing calculators, Facebook coupons, direct marketing, technician coaching forms, and more.  Try it at ServiceRoundtable.com or call 877.262.3341 and ask for a complementary tour to ensure it’s right for you.

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