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It’s brutal out there

Retired Navy SEAL commander and best-selling author Rorke Denver has a fantastic mantra that he often gives his audiences at leadership conferences and speaking events, which is:

“Calm is Contagious”

https://www.youtube.com/watch?v=xaxroF9yEH0

In the context of the COVID-19 inspired business crisis many of us are currently facing – this might seem like a tough pill to swallow while we’re forced to make tough decisions regarding layoffs, furloughs, and sourcing working capital amidst drastically reduced operating levels. To make things worse, the news cycles are dominated by depressing stories about families devastated by COVID, political in-fighting, arguments about timelines, and speculation regarding the barriers to economic recovery.

So, amidst all these stressors and mild “cabin-fever” from the shelter-in-place orders, we started thinking about our clients’ strongest leaders, and how they’re managing to stay calm and lead their teams out of this crisis.

Shuffling the deck

Many companies simply can’t operate right now in their traditional capacities (event planners, sports-related companies, labor-intensive manufacturers, etc.) and don’t have a clear idea of when they’ll be allowed to again (at least here in Northern California). However, many of our clients that are enduring this crisis are choosing to burn their calories on planning for the future instead of lamenting the present.

For example, a friend and client who is the co-founder and CEO of a software company who depends on live sporting events to generate users / activity is “doubling-down” on product development while they can’t pursue new accounts. He’s confident that burning his cash reserves and PPP funds by keeping his team focused on gaining market share from his competitors with product enhancements and new features will pay dividends when he can unleash his sales team again. He’s also staying remarkably positive, forward-thinking, and transparent in his discussions with his team.

Obviously not every business has the opportunity or the cash to emerge stronger in their core business – but this disruption is certainly going to “shuffle the deck” for many industries, and may reveal new opportunities, product offerings, etc. to help us emerge stronger.

Milestones

Probably the most common question we hear when talking to clients right now is:

“When do you think things will go back to normal?”

Unfortunately, we just don’t know. Nobody does. However, we do think that this recovery will be punctuated by two key milestones – (1) containment/acceptance, and (2) confidence. We think these are important milestones because our opinion is that once we achieve these two milestones, the economic recovery will begin to act a lot more like a “typical” recession. 

What do we mean by “containment/acceptance”? Basically, we need to collectively “contain” the virus by identifying & limiting transmission in discrete “pockets” of widespread transmission, while simultaneously “accepting” that there is going to be a certain degree of risk associated with “getting back to normal.”  Obviously, both of these metrics are subjective, but I think we can all agree that there’s way too much collective fear and uncertainty regarding the distribution of the virus in our communities to say that we’ve crossed this threshold. Second, we need to regain some of the confidence that’s been lost over the past months as unemployment has surged and consumers are preserving cash as an instinctual reaction to an uncertain future.

A “typical” recession & recovery

There is no such thing as a “typical” recession – they all cause uncertainty & fear, and none are exactly the same. However, in the absence of a better term, we began to analyze previous recessions to estimate the average rate of economic recovery in prior periods of distress. Thus, we can use this data to inform our current expectations for recovery.

Note: A recession is defined as two consecutive quarters of declining GDP and rising unemployment, so we’ll be focusing on these two metrics of economic activity.

Credit: https://fred.stlouisfed.org

In the graph above (courtesy of the St. Louis Fed), the blue line represents the unemployment rate (expressed as a %) and the red line represents GDP (expressed as a % change over the prior quarter).

Observations:

  1. The financial crisis of ’07-’09 (which many of us remember well) was a dumpster fire. Not only did GDP contract at its fastest rate since 1960, but the surge in unemployment was severe and prolonged. There were many intrinsic factors that led to this (too many to discuss here), but I think if we look at the data it’s safe to say that this recession was an anomaly (whew).
  2. The other 3 most severe recessions (marked with green circles) all shared one key characteristic – a sharp decline in unemployment following the “inflection point” of the recession!

Conclusion

Q1’20 figures were not available when we wrote this post, but rest assured they’re going to be “gross.” Q2’20 figures are not going to be better. However, if we look to our historical recoveries, we think we’re far more likely to rebound much quicker than the most recent financial crisis that many of us remember all too well. Accordingly, we’ll hopefully be on a path to a speedy recovery following the milestones listed above. 

In the meantime, we’re choosing to stay productive – stay calm – seek new opportunities, and plan for the rebound.

GDP