Raising a Red Flag on Growth

Despite great economic data, warnings about a global downturn heat up. How leaders should prepare for selective adjustments.

The U.S. economy is humming along, corporate profits continue to rise, unemployment is at levels unseen since the 1960s, and the stock market is near all-time highs. And, as always, the warnings that it won’t last just keep coming. 

This time, though, the message is getting louder. The International Monetary Fund cut its global growth forecast, pointing out pullbacks in Europe and Japan. That's right on the heels of a bleaker message from the National Association for Business Economics; two-thirds of its members are predicting a recession by 2020. The groups site several reasons for their pessimism, increased trade tensions chief among them. Meanwhile, stock markets have become shaky now too, with the Dow Jones Industrial Average down about 5% in a two-day span this week.

The good news, experts say, is that U.S. companies—and their leaders—took away some hard lessons during the last recession a decade ago and are in a far better position to deal with a downturn.“Anytime you have an economy that wipes out a stock market by 60% from peak to trough, you learn a lot and you become more risk adverse,” says Nathan Blain, a Korn Ferry senior client partner and global leader for organization strategy and digital transformation.

In the wake of the last recession, U.S. companies became more conservative and efficient in the way they allocated resources and even assembled staffs. They have salted away record amounts of cash to help get them through tough times and spentmoney more judiciously on their plants and equipment. With less corporate overhead during the good times, there is less to reduce during a downturn. “Many corporate leaders say that they never want to lay off that many employees and shut down that many businesses again,” says Blain.

To be sure, operational cuts, including headcount reduction, will always be a byproduct of an economic downturn. “It’s just that companies will be smarter about it the next time,” says Blain. He expects, for example, that companies will be less inclined to reduce headcount starting with the highest salaries since that approach is a surefire way to jettison talented workers.

Melissa Swift, a senior client partner with Korn Ferry Hay Group, adds that in preparing for the next downturn, companies should be more inclined to redeploy workers rather than merely laying them off. For example, the leaders of a consumer products company should focus on shifting workers away from supporting premium brands to store brands and other generics that appeal to customers with less disposable income. At the same time, executives need to resist cutting “innovation budgets” since they may inadvertently compromise their futures, she says

Patrick O’Meara, a senior client partner with Korn Ferry, agrees. He advises a number of leading industrial companies that are seeking to transform their businesses through technological innovation. All of them are more focused on remaining relevant in a fast-changing marketplace than worrying about the next economic downturn. “Even when they were in bankruptcy, General Motors was focused on game-changing ways to make their cars relevant.”