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The risk of an economic downturn is high, with economists surveyed by The Wall Street Journal estimating a 61% probability of a recession beginning sometime in 2023. Business contingency plans for recession are valuable, as I have argued in the past, but when should the CEO pull the trigger? At what point will it be time to execute the contingency plan?

The bad news is that economists (such as myself) do not have a great track record of providing advance warning of recessions. As a group, we did not predict most of the recessions of the last 50 years. One we did correctly forecast we thought would be mild, but it turned out to be very harsh (the 1980 recession).

Surveys of business leaders are no better. In 2018 I noted that a survey of CFOs showed nearly half of them expected a recession in 2019—but nothing bad happened that year.

Monitoring actual economic data can be useful, but the value is limited. The best data, gross domestic product, comes out nearly a month after a quarter is over, and even then it’s subject to revision as more data about that quarter is tabulated. The greatest problem is the GDP combines all of the country’s different industries into a single number. A particular business will gain more from looking at specific sectors.

An individual company can monitor its own results in a number of ways. A liquor store probably has to measure actual sales. A contract manufacturing company, however, records sales as the product is shipped. Their contingency plan trigger could, instead, derive from incoming orders. A contractor might use requests for bids as an indicator of where they are going. Businesses with sales funnels should monitor every step of the sales process. Tracking the company’s internal data should become a habit even in good times. Every data series will have blips, oddball readings from which the series bounces back in a month or a quarter. Getting used to seeing the noise in the data will help decision-makers use the data in critical times. Graphing the data is hugely valuable.

Company-specific indicators become more useful when placed in the context of broader economic data and industry information. If all the economic indicators are flashing red and the company’s orders also fall, then pull the trigger. But if the incoming data are mixed, perhaps some caution is in order.

The particular trigger point can be selected with the company’s specific condition in mind. A company with little debt and lots of cash can wait longer than a company with little cash and a nervous bank looking at its line of credit. If the trigger variable indicated precisely what the future would be, then the same trigger point could be used for any company. But businesses operate in an uncertain environment. The financially healthy company can take more risks, while the more precarious company must be more cautious.

Whatever measure is chosen, the CEO should pause for a moment before executing the recession contingency plan. Does the measure provide good information right now? Perhaps a major customer had their labor union strike, but they are now getting back to work. Or maybe a hurricane prevented some customers from placing orders. In most cases, the CEO will want to use the actual data, but a brief check of the numbers makes sense.

Trigger points for the recession contingency plan enable the CEO to make a quick decision that is consistent with well thought strategy.

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