Most people really don’t understand the fundamental mechanics of how recessions occur.
Recessions occur just like economic booms occur ― they run on human emotion and reason, in both the negative and positive sense. When investors and business executives perceive economic conditions will be favorable for the next 4-5 years, they invest and hire people. When Donald Trump was elected president on November 8, 2016, the economic boom took off.
When they expect economic conditions will not be favorable, they essentially “go on strike” and pull back on investment and growth expansion. And hiring new full-time employees. This happened after Barack Obama was elected in 2008 and re-elected in 2012. America suffered the lowest eight-year stretch of economic growth under President Obama since the 1930s.
It is happening right now as well since Obama’s vice president, Joe Biden was elected in 2020. No one is expecting explosive economic growth as long as Biden is in the White House and his leftist socialist Democrats control Congress.
Business owners plan for the future. They want to make more profit each year so they can expand their business and make more money the next year. They take account of expectations for interest rates and inflation and make pro-forma budgets according to their expectations which they submit to their board or shareholders and discuss what to do next.
Operating margins for every company, meaning the difference between the costs of doing business and how much revenue a business can generate selling a product or service to customers, are under extreme pressure today.
One friend in the restaurant business said his cost of goods sold (COGS) has increased over 15% this year alone. Hourly labor costs, mostly for back-of-house staff, have increased over 25%. Salaried labor costs have increased over 7% since the start of 2022. COGS and labor cost comprised what is referred to as his “prime cost”. Prime costs have increased in excess of 8% overall. As a result, his free cash flow, or gross profit, has decreased significantly on a relative basis-same store sales level year-over-year.
The cost of building new restaurants has sky-rocketed due to Biden policies. Construction costs are up over 25% on average. This includes all material costs such as steel, concrete and lumber to build new stores, some of which are up 100-200% over 2020 levels. Furniture fixtures, equipment and artifacts (FFE&A) are up over 20%. It has been increasingly difficult to order FFE&A and receive timely delivery due to on-going supply chain problems. There are now fuel surcharges being added to all invoices for delivery to their existing operations and for planning new restaurants.
Based on current expectations of inflation, interest rates and on-going costs, many businesses are deciding not to invest and instead wait out a recession and hope to restart after it is all over.
When a restaurant chain decides to not build more stores, it means they will not hire 100+ people to be managers, chefs, bartenders, line cooks and servers for each restaurant. The construction companies/general contractors subsequently will not engage their teams to build a new restaurant. They will not hire their subcontractors. They will not order materials or FFE&A. The property owners/landlords will not have a tenant to occupy the space and pay rent.
It is a simple game of mathematics. What starts as a slowdown in growth eventually becomes a turndown in the economy as more and more people are fired and construction crews are idled due to no work being funded by businesses that previously were planning to grow.
When coupled with a Federal Reserve that has to reduce the amount of currency in the economy to calm inflation fears, the economy is poised possibly for a recession as nasty as the 1981-82 recession caused by the inane policies of President Jimmy Carter and his hand-picked economic team. It wasn’t until Carter appointed Paul Volcker head of the Fed in 1979 and Ronald Reagan was elected in 1980 in the largest landslide victory ever over an incumbent president that it became “Morning in America” again.
The American voter knows something is seriously wrong with the policies of President Biden and the Democrats. They have the chance to wipe out their terrible policies with a similar landslide election for the Republicans this November.