What Can PEOs Do to Prepare Should We Head Into a Recession?
Since March 2020, we have faced a global pandemic, a tumultuous political rift and an economic shutdown—and we are still trying to figure out how to make it all work. But now, 2½ years later, what does this mean for our workforce, the economy and PEOs specifically?
It means that, as professionals, we must be prepared for just about anything. Our economy is in a place it has never been before. We have never experienced a near-shutdown of our economy as we did in early 2020, and we are still feeling the effects.
Our New Normal
Our economy is changing and industries are adjusting to this “new normal.” For Professional Employer Organizations (PEOs), it is important to adapt to these continuous changes to compete in the industry.
PEO expert John Slavic, who is the CEO of PrismHR Marketplace partner Slavic401k, a company that provides business retirement saving solutions, looks at the PEO space through an economic lens. “The perception was that, across the board, everything stopped,” said Slavic regarding the global pandemic and shutdown. “But that wasn’t all true.”
“Many companies were set up to have their employees work remotely,” he said. “And they were actually able to accelerate during this time. Not all companies were affected equally.”
The PEO industry is a prime example of this. Many PEOs were able to function successfully through this turbulent time, as were professional and accounting firms, medical practices, technology companies and more. With the infrastructure in place to allow employees to work remotely and utilize Paycheck Protection Program (PPP) loans, which allowed small businesses to pay their employees during the pandemic, companies were able to weather the storm.
Even so, our economy continues to evolve and PEOs must follow suit.
What Is Happening Macroeconomically?
Macroeconomically, we have nothing to compare to the current, fragile state of our economy. So it is difficult to track where things will go from here. Although there have been talks of the “R-word”—“recession”—Slavic says today’s economic situation doesn’t fit the classical definition.
In a traditional recession, unemployment and debt will be high. That isn’t representative of our current position.
In July 2022, the unemployment rate was 3.5%, the lowest it has been in 50 years, and employers even added a whopping 528,000 jobs to the labor market in July.
Debt isn’t rising quickly either. “In a recession, people are just trying to survive, so they go to their credit cards. They accumulate all kinds of personal debt,” Slavic said. “Right now, we have historic savings levels, because a lot of people were able to save or defer into 401k plans, IRAs, regular savings or investment accounts that they never would have been able to rely on in a traditional recession environment.”
Inflation, on the other hand, has been a significant problem. Gas prices, for instance, peaked at over $5 a gallon average in June (gas hit $7 to $10 a gallon in some places), an all-time high, but have since dropped back to just under $4 a gallon as of mid-August. For perspective, on average, gas prices were at about $3.19 per gallon a year ago, the first time they went above $3 per gallon since 2014. And if you’re looking to travel, hold onto your hat as airline prices have soared almost 28% in the past 12 months.
“Unless there’s a dramatic change politically, which could happen, we’ll probably be at around $100 a barrel of oil for a very long time,” Slavic predicts.
Grocery prices are still climbing, too. A box of Cheerios, for instance, is 29% higher than it was two years ago. Want to spread some Jif peanut butter on your bread? That will cost 43% more than it would have in January 2020.
And with a chip shortage, supply chain problems and other factors, new car prices have shot up dramatically in the past year with the average vehicle selling for over $47,000. Used car prices have also skyrocketed.
It’s difficult to predict how our new economy will continue to evolve since the future forecast is still up in the air. “We’re really in uncharted waters, in terms of what the economy is going to look like,” Slavic said. So PEOs need to be prepared for whatever comes next.
How Can PEOs Prepare?
There is no handbook on how to deal with a one-of-a-kind economic situation such as this one. But if PEOs are cautious, careful and conscious, they can still maintain success for themselves and retain their best workers. Workers who switched jobs received increases of 6.4% over the last year versus 4.7% for those that stayed at their jobs. This data goes back to 1997 and this is the widest gap we’ve ever seen. It may not seem like a big jump for PEOs, but it makes a difference for employees.
Slavic believes it to be crucial for the PEO industry to focus on professional and technological companies when moving forward and targeting new business in our ever-changing economy. “Because those will be the ones that are less prone to inflationary pressures than other types of businesses.”
Although federal policies, such as the contractionary monetary policy, are expected to be put into action to relieve these inflationary pressures, it is still crucial for PEOs to be mindful of these risks if they want to stay profitable and competitive within the industry.
“It really is up to the PEO to examine its client base, to examine the companies it’s going after,” Slavic said. “They can be, in a sense, advisers to their clients in navigating all this.”
Our new economy is still unexplored territory. Everyone is learning as they go. PEOs must be calculated in their client-based decision-making if they want to avoid falling victim to inflationary strains and economic hardships.
Final Thoughts
Although much of the pandemic seems to be behind us, we are still very much feeling the effects of it. The best thing we can do as professionals is to adapt to the continuous changes and adjust to our new normal. PEOs can still be successful and our workforce can still thrive.
“Those PEOs positioned in those industries in their market that are not going to be inflation-sensitive are going to do pretty well,” Slavic said. “Those that bet the wrong way could struggle. And that’s kind of the age-old thing that’s happening in the PEO space.”