With economic indicators signaling trouble ahead, Answer Desk readers are bracing for a downturn. Many, in fact, are convinced the sky has already fallen. But some readers are taking a more optimistic approach — like Sheila in Utah who is wondering which businesses do well when the economy heads south.
Can you tell me what type of business does well in a recession?
— Sheila, Layton, Utah
Though a recession describes an economy in reverse (it shrinks instead of grows) that refers to the overall level of activity across the country. Some businesses (like housing) and regions (like parts of the industrial Midwest) are already in recession. Others may feel little or no impact from the current economic downturn, which may or may not turn out to have been a recession when all the economic data are collected in a few months.
Some businesses are more vulnerable to recession than others. Carmakers, for example, often suffer badly because buying a car is usually a longer-term decision. When times get bad, people tend to put off buying a new car as long as they can.
Other businesses are said to be “recession-proof” (though few really are.) Funeral home directors and accountants, for example, can safely assume a recession won’t have much impact on death and taxes.
But the list of reliably recession-proof businesses is pretty short. Since 70 percent of the U.S. economy relies on consumer spending — and consumers typically cut back when a recession hits — there are few consistently safe shelters from the storm of a serious downturn.
One way to think about which businesses face the greatest risk is to ask: What products and services are people going to continue to buy even if there’s a recession? Health care companies generally do well because people get sick just as much in a recession (sometimes more) as they do when times are good. Even in a recession, you can't dry clean your clothes at home, and people still need to buy car insurance.
There's more to surviving a recession just being in the right business. Some businesses don’t act quickly enough to cut prices as demand dries up. Others may find themselves too heavily in debt and unable to borrow more money to get them through the downturn. Some businesses “scale” better than others; those with high fixed costs may be more vulnerable than businesses that can survive for a time on a shoestring.
Surviving a recession as a business is not all that different than surviving as an individual. If you think you’re a possible layoff candidate, you fire up your social and professional networks and find out who might be hiring. Business owners who see a downturn coming often turn to their customers for guidance. The sooner they find out which customers plan to cut back, the sooner they can plan to make the changes they need to cope with those cuts.
I heard the U.S. is about $9 trillion in debt long-term. Are we at a point in history that it is impossible to balance the budget?
— Anthony L., Palatine Ill.
Never say never. But while the deterioration in the U.S. economy is beginning to get some traction on the presidential campaign trail, balancing the federal budget doesn’t get much attention. One reason is that none of the candidates wants to explain what federal programs they would cut or who they’d ask to pay more taxes.
As of this writing, the outstanding public debt amounted to $9,202,650,551,336.71 — or about $9.2 trillion. Of that, about $5.1 trillion is held by the public and another $4 trillion or so is held by government accounts (like Medicare and Social Security.) For the past year or so, the national debt has been growing at about $1.5 billion every day. (In theory, there’s a legal limit to the national debt, but every time Congress needs more it just votes to raise the limit when no one’s looking.)
Ironically, higher inflation and/or a weaker dollar could offer some relief from the debt bomb. Simply put, both forces allow the U.S. Treasury to pay back borrowed money with cheaper dollars. Since the value of the dollar has fallen steadily since the recession of 2001, so has the value of the debt we owe to foreigners. If domestic inflation returns, tomorrow’s $100 debt payment will be a lot easier to make because those dollars will represent less real (inflation-adjusted) value than the dollars that were originally borrowed.
But a weaker dollar or higher inflation also comes with nasty side effects for American consumers. Inflation destroys domestic savings just as surely as it makes debts easier to pay. Your $1,000 Treasury bond is no longer worth what you paid for it. And if the dollar continues to fall, it eventually loses its place as the world’s reserve currency. If that happens, the impact on anyone paid in dollars becomes even more pronounced.
In spite of the Treasury’s stated support of a strong dollar, and the Federal Reserve’s longstanding mandate to treat inflation as Economic Enemy No. 1, the huge overhang of federal debt is making those goals increasingly difficult to achieve. Heavy borrowing by Uncle Sam has contributed to the dollar's slide as investors who pay with other currencies worry that they may not get all their money back. When that happens, investors usually demand higher interest rates to offset the loss in value from the weakening currency.
But these are not normal times. The latest round of economic data has some forecasters wondering out loud if the U.S might not already be in a recession. That’s hardly a good time to raise interest rates. Add to that the backdrop of a presidential campaign — when the Fed has historically done its part to keep the economy humming by encouraging more borrowing and spending. As Fed chairman Ben Bernanke made clear last week, the central bank is focused on cutting rates — the only question is how far and how fast.
In the end, the problem is really outside the Fed’s control, even though it is usually called upon to clean up the mess. The solution is for Americans to get back to saving and investing —both individually and collectively. That means saving up for a big screen TV before you buy it — instead of just putting it on your credit card. It could also mean raising more taxes —or shifting the burden. If higher taxes are no longer politically feasible that means giving up more government services.
The reason this hasn’t happened is that giving up the trip to Disney World or supporting higher taxes to repair crumbling bridges requires sacrifice. At the moment, our political leaders have not been able to package the problem well enough to sell real solutions. We all share responsibility: Congress and the White House have failed to take on the tough work of balancing the budget, in large part because voters insist on getting something for nothing in the form of tax cuts without corresponding cuts in services.
As long as Americans rely on others to subsidize their personal and public spending, it’s going to be tough to slay the debt monster. It’s hard to predict when it will bite back. But until the U.S. gets its financial house in order, we’re living on both borrowed money and borrowed time.