Between market events such as the inversion of the yield curve on U.S. Treasury bonds and geopolitical risks such as the trade war with China, concerns that the country is headed for a recession have been growing steadily over the past few months. For instance, in March, a survey of 53 professional economic forecasters, conducted by the National Association for Business Economics, placed the odds of a recession sometime before the end of 2020 at 35 percent; by June, the same survey found that the estimated chances had risen to 60 percent. These signals have led some CPAs to begin preparing for a downturn, while others remain confident that they won’t be overly affected, given the differing levels of exposure to macroeconomic risk factors.
With the success of CPA firms so bound up with that of their clients, practices of all sizes have been keeping a close eye on the economy.
David G. Young, founder and managing partner of Young & Company CPAs, LLC, and a director-at-large on the NYSSCPA Board of Directors, said that while he and his firm are “not worried per se, since we can’t control if there is a recession or not,” he has been preparing. A big part of this preparation, he said, is to follow the same advice he has been giving to clients regarding a possible recession: Protect cash flow, control expenses, keep to a budget, stockpile cash, and maintain lines of credit.
However, he said, his clients, overall, don’t seem to be worried about a recession—their main concerns right now are centering around high taxes in New York.
But Young has also been taking more CPA firm-specific steps, which mainly have to do with evaluating the situation.
“We also make sure we’re mitigating our exposure to risk from clients and/or third parties,” he said. “We make sure all our engagements, tax or otherwise, have a detailed engagement letter. We evaluate all the clients to see if [each] client is still a good fit for our firm and, if not, we will disengage from the client. We actively work with our [errors and omissions insurance] carrier to see what best practices they recommend. (This is all to protect the CPA firm from getting sued by clients and/or third parties if a recession negatively impacts the client).”
Joel A. Cooperman, co-founder and CEO of Citrin Cooperman and a member of the Large and Medium Sized Firms Practice Management Committee, said, “Recessions have a cycle to them, and I believe we’re about two years past that cycle right now, so to think we won’t have one is silly.”
However, as a firm owner, he said the 2008 crisis is a good example of how the firm might react to an incoming recession. During that time, he said, “we did nothing different in ’08 and ’09 than we did in ’07 and ’06.” He said that this was because, no matter the economic conditions, his firm has always been mindful of controlling expenses, and right now, he is carefully watching new client generation to “make sure we’re not overhiring staff,” as well as assessing office lease renewals. But, he said, his firm is not particularly worried about a recession because it has a deep capital reserve that it will reliably be able to lean on in the event of a recession.
He did note, however, that not everything remains the same in recessions. For one thing, because clients won’t have as much money, the firm will need to pay more attention to billing, as “we don’t want to run up $50,000 in fees without the expectation and clear understanding of how it will be paid.”
“We’re already battening down those hatches,” he said.
Another thing is that certain advisory practices—litigation support, IT, cybersecurity and transaction advisory—tend to slow down fast in a recession, “so these are areas we need to be very, very careful about.”
One thing he said he absolutely did not, and does not, want to do, however, is to burden the staff. During the 2008 crisis, he said, he made it a point not to cut benefits and to keep giving raises because he thought staff loyalty was more important, although he noted that the firm was able to do this because of the aforementioned capital reserves.
“So we’re careful right now to retain more capital than we might have ordinarily retained at the end of the year,” he said.
Orumé A. Hays, a sole practitioner and chair of the Small Firms Practice Management Committee, said that her clients, too, seem more optimistic about the economy and aren’t concerned about an oncoming recession. She added, however, that she herself is closely monitoring the situation.
“As a firm owner, I am implementing the same advice rendered to clients,” she said. “We are keeping an eye on costs and cashflow; however, we are ready to take advantage of any opportunity a recession might bring about.”
Differing outlooks from industry CPAs
CPAs in industry report differing levels of concern over a possible recession, based on their companies’ circumstances. For example, although Anthony Cassella and Jack Vivinetto both work in industries that create goods, the large differences between what their companies do have produced large differences in how they’re reacting to a possible recession.
Cassella is the CEO of J. Queen New York, which deals primarily in goods such as comforters, towels and rugs. He has seen several recessions come and go over the years, but, he said, the current situation is much more precarious. Inventory management is a major component of his firm’s success, and so, traditionally, when he believes hard times are ahead, he has worked to adjust how much his firm buys and holds. Today, however, the White House’s tariffs have complicated his ability to do so, which has limited his ability to plan for the future. This is particularly troubling, given that his products are more sensitive to the wider economy, as they are generally considered discretionary spending.
“People do not have to buy a new comforter necessarily. They will wait, they will look for sales, do other things. I think that will start to reflect itself in the marketplace. It’s a very, very difficult situation,” he said.
That being the case, Cassella said his company is always looking for ways to be more resilient, simply as a matter of course, and so he is always finding ways to cut costs like freight and warehousing. However, he said, “We just … are doing it with a little more urgency right now.”
In contrast, Vivinetto is the CFO of the Sugar Foods Corporation, which concentrates on consumer staples, namely candy, bulk sugar and other grocery items. He, too, has seen several recessions in his career. When asked what his company tends to do when it sees a possible economic downturn ahead, he said, “Nothing.”
“We’re in a different category,” he explained. “We’re considered consumer staples, nondiscretionary. You have to eat, OK? Because people have to eat, that means we’re going to have the same sales volume, the same products, which means we can’t cut back on production, since we still have to make the product. So the macroeconomic changes really do not affect us at all because the basic business model we have is: We make good products for consumers, and if there was a recession in eating, we would feel it.”
Vivinetto also pointed to his firm’s culture as another reason for him not to worry. Generally, he said, its response to downturns has been to grow its way out of the business cycle rather than cut costs and lay off staff. The company can do this, he said, because it typically has not lost much revenue during recessions.
“What we may, may, consider is pausing on R&D. Maybe there will be a little pause there to see how that shakes out. But in general, we don’t cut,” he said.
But Vivinetto did say that if he worked for a bank, an investment firm or a real estate firm, then he’d be very worried.
General unease in banking, real estate, investment
Jeremy R. Goss, chair of the NYSSCPA’s Banking Committee, said that while the banking clients that he has observed have not been making major public moves in preparation for a recession, he has found, through conversations, that there is a sense of general uncertainty within the sector.
“I wouldn’t say I’ve had specific conversations [along the lines of], ‘We’re taking this particular strategy because we see a downturn coming.’” he said. “While bank balance sheets and earnings metrics remain strong, there is a lot of talk in the media out there, and you’ve got to pay attention to that to some degree, since psychology can factor in the equation.”
Goss said that, traditionally, when banks have been worried about the future, they have tended to take measures such as reassessing investments, diversifying their customer base and maintaining higher levels of capitalization. If a bank is particularly well-capitalized during a downturn, it might look into acquisition strategies, as some did during the 2008 crisis.
But, he noted, “We’re in a transition time for banks right now.” Regardless of macroeconomic trends, he said, banks have been challenged with outside pressures from nonbank tech companies that have been competing with them for products such as payment services, and many are determining how to respond. This environment, he said, “muddies the waters a little bit” when considering what they might do during a recession.
The real estate world, in contrast, has been seeing a great deal of activity of late, according to Jason A. Hoffman, chair of the Society’s Real Estate Committee. While aspects of that field, like bank financing, are responding to sector-specific pressures (such as the recently passed statewide, sweeping rent regulations in New York, which, he noted, drastically changed property values), he said developers on the whole are well aware of how a recession can exacerbate matters and have been making moves with that in mind. For instance, many developers are currently stockpiling cash, and he has been “seeing a lot of refinancing lately, especially for interest rates long term.”
These moves, however, are not necessarily defensive. Instead, he said, they are meant to capitalize on opportunities once a recession does arrive. At that point, he said, prices will fall even lower, and those who are prepared will be able to quickly capitalize on the environment and snap up good investments.
“Everyone is gearing up for when it is time to buy,” he said. “They want to be in a good situation, so they’re locking down long-term credit, they are starting to refinance … and preparing capital they will need for when there is an opportunity. … It’s better to get it now, while people are still interested in doing deals, than when, in a recession, everyone is scared. So locking up capital in advance is one of the biggest things you can do.”
Anthony J. Artabane, the chair of the Society’s Investment Management Committee, said that, right now, the fund industry has responded to macroeconomic trends by moving into what he referred to as a cost focus. He said this does not necessarily mean cost reductions, but rather, passive, low-cost strategies like index funds and exchange-traded funds, which many retail investors have adopted. In contrast, he said, active fund managers have been losing assets year-over-year due to concerns over fees—something that has long been an issue in the fund world, but, as in real estate, is exacerbated by the current economy.
Other people’s responses to a possible recession have also been leaving a mark on the fund world, he said. Beyond the movement from active to passive investment, he said that people are looking to build more cash, and so he has been seeing movements from equities to fixed income, which is a traditional step when people want to be financially defensive. While these products are less profitable, he said, they are seen as more secure.
Wealth advisers remain calm
Madelyn R. Miller, a managing director and financial adviser in JPMorgan Chase’s wealth management division and a member of the Family Office Committee, does not herself believe a recession is on the horizon, and even if it was, she noted that many family offices are long-term focused and built to withstand volatility. While she did acknowledge that “we all know this doesn’t look and feel good right now,” she has advised her clients to remain calm. When they do occasionally call with concerns about the state of the economy—she has seen a very slight uptick in such calls—she said that “we’re not doing total rehauls; [we ask] what can we do along the edges to protect them.”
“I have seen, sometimes, when advisers are giving them so much tactical [advice] to redo their entire portfolios,” she said. “I don’t think they’re always coming out ahead.”
That being said, she said she has explored a number of different options for clients looking to be more defensive in the current economic environment. For instance, shifting investment balance from growth-oriented to value-oriented equities were what she said were the “steady eddies with high dividends or strong dividend history or performance.” Similarly, slowdowns and downturns see fixed-income strategies shying away from high-yield bonds, which tend to be risky, in favor of safer, if less lucrative, bets.
“What we’re saying to clients sitting on a lot of cash today is to stay in something very, very safe and short,” she said.
JPMorgan has also begun to explore gold-structured products—that is, structured notes based on the price of gold. While gold has typically been seen as a safe place to hide money during recessions, she said that gold itself is highly volatile. Gold structures, on the other hand, are engineered to shield holders from most of that volatility, and so have become an attractive alternative.
An additional area of stability she said that her firm has been exploring is low-volatility hedge funds, not the types that “get a huge bang like those 20 percent returns everyone used to look for,” but rather, “single digits, below 10 percent.” This is all to build something that’s less sensitive to market shocks.
“We want to have a basket that behaves differently than the stock and bond market, and sometimes hedge funds can accomplish this,” she said.
David M. Barral, a wealth adviser with The Northern Trust Company and chair of the Personal Financial Planning Committee, noted that while he has heard that clients of other firms are beginning to stockpile cash, he hasn’t been seeing that among his own clients. But he said that this could be due to his firm’s wealth management approach, which provides a customized portfolio, matching financial assets to goals, instead of focusing solely on risk tolerance and volatility. Specifically, he said that a portfolio reserve—a fixed-income allocation to fund lifestyle goals through periods of distress—may have a “bond runway of let’s say seven years,” noting that such a reserve gives the equities in a client's portfolio time to recover from a market downturn.
“If you called someone at another firm, they might say that clients are beginning to stockpile cash or go into gold—it really depends,” he said. “But I don’t see our clients in a mad dash to buy $20 million in gold. You might have one or two people who may, but I don’t see this being a massive run.”
Barral also pointed out that concern is relative. Average people can be quite vulnerable in a downturn, because if they lose their jobs suddenly, they’re thrown into an existential challenge of how they will support themselves and their families. On the other hand, high-net-worth clients have the resources to get through most recessions, and so the types of things they worry about, and the degree to which they do, can be quite different. In any event, he suggests that both the average Joe and high-net-worth individuals should pay down debt, especially high-interest debt, if they think a market downturn is looming.
Michael E. Goodman, founder and president of Wealthstream Advisors, Inc., and a member of the Personal Financial Planning Committee, said that “it’s kind of obvious we’re due for a recession,” but he has not reported any extraordinary moves. Client guidance in such times tends to be centered around activities like building up cash reserves and cutting expenses. Overall, however, his firm has tried to keep its focus on the long term and not overreact.
On the whole, the profession appears to agree with him: There’s no real sense of panic regarding a pending recession. CPAs are taking smart precautions, however, to ensure that their firms and clients can ride out a potential downturn.