In the years leading up to December 2007 there was a growing chorus declaring the end of business cycles. Clearly, business cycles have not gone away, and new research shows that the nature of recessions has changed in troubling ways.
We can't predict when the next one will come, but those who fall in its wake will face a tough road to recovery. That is because recessions are increasingly structural events. They occur less often but involve more economic disruption. In particular, they are followed by "jobless" recoveries and feature more permanent layoffs.
These effects are clear in the current economy. Five years into the so-called recovery, total unemployment has fallen but nearly three million people remain among the long-term unemployed. GDP and stock values are rising, but income for most people isn't. Average take-home pay for middle- and upper-middle-class families, corrected for inflation, saw little change from 2010 to 2013. In fact, median income was five percent lower in 2013 than in 2010. So the income growth that has occurred has gone to a smaller number of higher income households.
Expansions are longer, thanks to a combination of more aggressive meddling by the Federal Reserve, better production management by companies and the predominance of service industries in our economy. But the price of longer expansions is the building up of structural imbalances which, when they inevitably correct, they bring more pain in the form of long-term unemployment.
In the current case, unsustainable increases in property valuations and unchecked access to debt capital contributed to a massive imbalance between the revenue expected from real estate investments and the ability of people to service the debt. The slow recovery is due to major shifts now underway. Household spending and debt is one of those structural changes. Unsupportable debt levels built up during the expansion have been followed by weak consumer spending as families pay down credit cards in an economy with slowly rising incomes.
An industry shift is underway away from real estate-related jobs. The housing-fueled expansion of 2001 to 2007 attracted millions of workers into construction, real estate and related finance jobs. After five years of recovery U.S. employment in these sectors remains 20 percent below its pre-recession peak. Those jobs are not coming back.
Five years after the Great Recession ended, many are asking when the economy will take off. The more important question is will you be ready for the next downturn. Resiliency will be the key to surviving the next recession.
For individuals this means:
Thinking of your career as a business. How would you operate without the income provided by your current employer? Creating a business plan for your career can help you cope with uncertainty, use time more productively on activities that advance your objectives, and identify resources and people who can help you.
Deepening learning skills and broadening your expertise. Know how to use new learning tools like online courses and computer-based training and then develop knowledge, skills, and abilities, which can be applied in other industries and other occupations.
Staying informed about the economy, your industry, company, and occupation. Leverage the value of lead-time by keeping abreast of the direction of the economy. A clear-eyed view of where your company and occupation may be heading can help you assess future job prospects and inform your decisions about how best to remain marketable to your current or future employers.
Building sound finances while employed. The key elements of a resilient financial foundation are saving regularly, managing debt and protecting personal credit, and investing wisely.
Businesses, too, need to build resiliency:
Retool your existing workforce for adaptability. Employers are relying more and more on temporary workers. But a better strategy is to invest in enhancing the skills of existing workers and retraining existing employees for future workforce needs.
Adopt business management best practices. The management practices most effective in boosting business resiliency are well known and publicly available but adopted by surprisingly few firms. They include things like maintaining lean production processes, setting explicit targets for the company that cascade down from top management to individual workers.
Engage customers in innovation. Adjusting products and services to changing customer tastes is an important part of resiliency. Social media and other modern communication tools make it possible to know how your consumers consume, how they'd ideally like to consume, and what would solve their problems, and to involve customers in shaping the product.
To survive, and even thrive, in a world of unrelenting change, people and businesses have to stay informed, be nimble, and be ready and able to adjust and innovate. The next recession, whatever its underlying cause, and irrespective of whether it is mild or severe, will mean change. Being well prepared for it can make it a change for the better.
Stephen J. Adams is President of the non-profit American Institute for Economic Research, which conducts independent, scientific research that helps ordinary Americans advance their economic and financial interests and those of the nation.