- When consumers spend less, profit slows, forcing businesses to cut costs and assume a more defensive stance.
- For some industries, consumers will continue to spend, which means the businesses are not harmed by the recession.
- Investors need to look into the industries that provide goods and services people need to find good stocks to invest in, regardless of the state of the economy.
When you hear of a pending recession, you immediately conjure up images of people and businesses struggling as the economy slows. These images might even come to you in black and white.
While this is the case, not every business is impacted to the same degree. Some companies even thrive during a recession. Here is a look at why some businesses are hurt during a recession and other industries thrive.
What is a Recession?
A recession is a period of economic decline usually called when there are two consecutive quarters of negative growth in the gross domestic product (GDP). Some experts feel that the unemployment rate needs to increase sharply in addition to negative GDP numbers for it to be a true recession. An inflationary environment often precedes recessions, slowing consumer spending further.
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the official body that announces a recession. It defines a recession as «a significant decline in economic activity spread across the economy, lasting more than a few months.» The committee does not have hard and fast rules for calling a recession, but it does give the most weight to personal income.
Why most businesses hurt during a Recession
The U.S. economy runs on capitalism, which has simple inputs and outputs. A business opens to provide a good or service, and consumers pay for their purchases with their income, budgeted or discretionary. The business earns a profit for each sale, while the consumer gets something that satisfies their needs or wants. As the business grows, it hires and pays employees who then go on to spend their earnings. These employees are also consumers, and consumer spending drives the U.S. economy.
Businesses can expect stable sales and profits during a normal economy where inflation is minimal and people have reliable incomes. Inflation upsets this balance by causing prices to spike and reducing the average consumer’s spending power.
For example, a consumer spends $75 a week on groceries, with an average cost of $3 per item. The consumer comes home with 25 items. Inflation causes the average price of an item to spike to $5, resulting in the consumer bringing home 15 items. That’s 10 items left on the shelf — items that would have been sold during a normal economy. In short, a recession interrupts the reliability of profits for a business.
The retailer has to decide to keep its pricing at the current level to maintain profitability or put the items on sale and make less profit in order to move their inventory to avoid a total loss on those items.
Different types of businesses that thrive during a Recession
People need certain types of services to support their daily lives. Life becomes more difficult without them, and certain aspects of society would literally break down without them. The following is a look at some of the services that aren’t significantly affected by a recessionary environment.
Daycare will always be in demand as long as parents need someone to care for their children while they work. This is true for both single- and dual-income households.
The only investment option for a purely childcare-centric stock is Bright Horizons Family Solutions. They operate childcare and early education centers in the U.S., Canada, and Europe. Since it is the only publicly traded stock in the industry, it is difficult to value it based on its peers. However, the financials are strong and the company plans to expand in the coming years.
The repair services category covers everything from automobiles to major home appliances. When something breaks down, it needs to be repaired. People repair items to save money and extend the life of their possessions.
Repair services are always in demand as a result, along with skilled technicians. In fact, demand for repair services increases during a recession due to consumers choosing to repair instead of replace while money is tight.
Most repair services are small, local businesses. Very few are large, publicly traded companies. But this doesn’t mean there no stocks to invest in, you’ll just have to think outside the box a little.
For example, you could invest in Home Depot or Lowes to take advantage of people repairing and updating their homes. Many consumers go the DIY route as opposed to buying a new house during a recession.
Also, you could consider Advanced Auto Parts, as people repair their vehicles instead of buying new.
Death is an unfortunate fact of life, and funeral homes are a necessary purveyor. Funeral costs have increased as environmental laws make burial more expensive. More people are being cremated as a result.
While many funeral homes are private companies, some operators are publicly traded. One of the best is Services Corporation International. They provide deathcare services including cremations, funerals, and cemeteries. While the S&P 500 is down roughly 20% for the year, this stock has stayed flat.
A few other stocks in this industry include AlderwoodsGroup, Carriage Services, and Stewart Enterprises.
Trash haulers take away daily, people and businesses will sacrifice in other areas of their lives before they go without removing their trash. This industry is recession proof.
Waste Management and Republic Services are two haulers that handles removal for residential, business, and municipal customers, helping the company to spread its risk compared to those that only service residential customers.
Republic Services operates nationally and is the second largest waste collector in the U.S. It has a history of solid earnings and a positive outlook on future earnings.
Cigarettes and Alcohol
While people will cut back on discretionary spending during a recession, they will not typically cut back on vices like cigarettes and alcohol. In the case of cigarettes, the people buying are addicted to nicotine, they will cut their spending in other areas first.
Same goes for alcohol. While consumption might decrease a little, it will not drop off significantly, let alone drying up.
Altria is a cigarette company that has had its ups and downs recently, but it is still a solid stock that pays a strong dividend. The biggest challenge Altria faces is government regulation on both cigarettes and e-cigarettes, something that negatively impacted Altria with its planned purchase of Juul Labs.
If you’re looking for an alcohol stock, Constellation Brands produces beer, wine, and hard liquor. Some of its brands include Corona, Wild Horse Winery, and Svedka Vodka. The company has strong financials and will benefit in a strong or weak economy.
If you are an investor looking to make money during a recessionary period, or at least limit your losses, look into the industries people can’t live without regardless of how the economy is performing.
If you need help determining where to invest, you can save time by utilizing an Investment Kit from Q.ai. These themed kits are designed to take the guesswork out of investing. Some themes include Inflation Protection, Value Vault, and Guilty Pleasures. You can even opt for Portfolio Protection to further limit downside risk.