Spoiler alert: there are benefits to being an independent contractor during a recession. Read on to find out why.
We have two experts weighing in for this edition of “Ask an Expert.”
Stacy N. is a senior analyst covering economics, finance, and real estate. She’s been in her current role for 6 years.
Bruce T. has been a financial advisor for a large international bank for 41 years.
(Both of our experts have asked to remain anonymous due to their employers’ restrictions on advice they can publicly give.)
Today we’re talking about recessions. Usually when this word is in the news, it isn’t accompanied by a lighthearted article. For the past couple of years, we’ve been warned that a recession could be coming due to a myriad of factors.
Our experts weigh in on recessions in general and how they affect independent contractors. Spoiler alert: there are benefits to being an independent contractor during a recession. Read on to find out why.
ICBA: What is a recession?
SN: It’s when economic activity declines for an extended period. More concretely, a recession happens when we collectively make fewer things, have fewer jobs, and make/spend less money.
BT: In general terms––not technically economic or finance––a recession is when a given area (it could be a neighborhood, a city, a state, a country, etc.) experiences a decline in income on average. The last time I looked, the average household income in the US was $55,000 a year. So a recession would be a year in which that declines over the prior year. If the next year it’s $53,000, that is a recession.
This is often compounded by the person’s costs going up. Let’s say there was some problem in the world and the price of oil went up, which meant the price of gasoline went up. Now driving to and from your job will increase your costs.
ICBA: Are all people affected evenly by a recession?
SN: No, some industries are cyclical (they generally grow in line with the broader economy), some are counter-cyclical (they grow when the economy is contracting), and some aren’t impacted by the economic cycle. For example, travel/tourism is usually highly cyclical, so people in that industry would feel the crunch more when a recession happens. But collections agencies are counter-cyclical, so these companies would grow more during a recession. Utilities (electricity, natural gas, etc.) generally aren’t impacted by the economic cycle because people generally don’t change their electricity use much depending on what’s happening in the economy.
BT: No, people are not affected evenly. In my prior example, if you were in the oil business, you would benefit from the cost of oil going up while the other people would suffer from the cost of oil going up. If there’s a reason that everybody’s income went down and costs went up, if you were the supplier of the thing that people are buying at a higher price, you profit from it. Let’s say you’re a farmer and the price of corn goes up. It hurts people who have to buy food, but it benefits people who grow food and sell it.
ICBA: What are the warning signs of a recession?
SN: The Conference Board publishes a Leading Economic Indicators Index. This LEI index compiles many metrics that have predicted a recession in prior cycles, such as the yield curve, manufacturing orders, initial unemployment claims, and lending conditions. This index has been declining for 14 straight months (the longest streak since 2009), and is signaling a recession sometime in the next 12 months.
BT: Often, but not always, a recession is preceded by a very serious external event that’s very disruptive. Covid would be one. Government spending during and after Covid was extremely high. There was a payment protection plan which loaned money to businesses to pay people even though they weren’t working and nobody was buying the products the company made. So this injected trillions of dollars into the economy to try to get people through this tough time. That was an expansion. But now that those payments have wound their way through the system over the last three years, the economy might contract. An increase in government spending all by itself will cause an expansion, and as that spending declines, the decrease in government spending will cause a contraction.
The other category is what people call a supply shock. Let’s say that there’s a drought and huge amounts of crops are wiped out. That would cause a really severe recession in areas that are primarily agricultural, but it’s also going to have an impact in other areas where people are having to pay a lot more for food.
ICBA: Is there any benefit to being an independent contractor during a recession?
BT: Yes. If you’re an independent contractor, you can go get whatever business there is to get yourself. If you have lived your life and run your business conservatively and kept your expenses low, then your cost of living is lower. If your competitor has to charge $X to cover all of their expenses, but your expenses are lower, you can charge less than them and get the business.
If you’re an independent contractor there’s a pretty good chance you have a lot more control over your business than if you work for a big company.
ICBA: What should independent contractors do to protect themselves during a recession?
SN: Learn about the growth drivers of the industry you’re in, and which segments may be the most counter-cyclical or immune to the business cycle. Lean into those companies and businesses.
BT: When times are tough, the person who is able to be flexible and adapt tends to win. The Darwinian expression “Only the strong survive” is not really true. Only the adaptable survive. And if you’re an independent contractor, you’re probably better able to adapt than a big company.
Remember: happiness is low overhead. I know many independent contractors who don’t drive fancy trucks. They use their equipment as long as possible. They don’t have expensive houses. They don’t have second or third homes and take lavish vacations. They live below their means, save as much as they can, and will be in good shape if times get tough.
I’m sure that a simple life is better than a complicated life, whether or not you’re an independent contractor and whether or not there’s a recession. That’s the advice I give to my clients, no matter how much money they have.