In a recent poll by the National Association for Business Economics, 72% of economists predict a coming recession in the U.S.
Further, 34% predict 2020 as a period when such a recession would begin, with 38% predicting it would occur in 2021.
Also, in the last two weeks, the 30-year U.S. Treasury bond interest rate “inverted” with the 10-year Treasury yield rate. That financial metric (of the 10-year interest rate becoming higher than the 30-year bond yield) has historically been the most reliable indicator of near-term recessions in the U.S. economy.
The contrary evidence regarding a potential recession is that U.S. “consumer confidence” — which drives two-thirds of our Gross Domestic Product — remains strong. Additionally, average hourly earnings for U.S. workers continue to increase.
However, the just-released August “Consumer Confidence” report showed a significant decline for a one-month period. Obviously, all the news reports about a possible economic downturn are now penetrating the public’s awareness.
Of course, we at Bailey Routzong hope that the 72% of economists are wrong! At the same time, we recognize that our current 10-year economic expansion has gone well beyond the historical cycles of growth periods in the economy versus periods of contraction.
Having been in the school business industry for 25 years, we know first-hand what “recession” means to school operators and to our own company. We saw our last recession, statistically beginning in 2009, financially impact our clients’ annual earnings and asset values in most cases for four to five years before they reclaimed pre-recession earnings levels. And truth be told, probably 25% of those schools have never fully recovered from that severe downturn.
Based on this historical experience, what has a “recession” resulted in for almost all school operators, and why?
- Loss of enrollment and gross revenue.
- Loss of earnings and, therefore, asset values.
- Bailey Routzong’s analysis shows that as little as a 10% decline in enrollment/revenue reduces earnings by approximately 30% to 40% from previous levels; it also reduces the business and related real estate asset values some 20% to 25%! (Read our blog “The Impact of ‘The 10% Canyon’ on School Operators’ Profits” for more information.)
Our experience from prior economic periods was that this unfortunate substantial loss in asset values shrunk the value of our client owners’ intended asset retirement fund value enough that their retirement by exit from their business became no longer financially feasible AND
Unfortunately, a significant pool of our owner/operator contacts became financially “trapped” into continuing to operate their school(s) several years past their previously intended retirement dates.
Even more unfortunate, the real-world reality was that many of these school owners were at a stage in life where the energy to continue to drive their operating businesses forward into the headwinds of the marketplace challenges had just gone away. Sadly, many just never recovered, and their schools remain unmarketable at other than very modest values.
What do you believe — the 72% or the 28%?