The Coming Storm

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The Coming Storm

October 22, 2022

The chorus in the financial press is growing that a storm of recession is on the horizon. Inflation has been described as “too much money chasing too few goods.” The combination of disrupted production during the Covid era plus government stimulus money being dumped into the economy, along with the increased energy costs as a result of the war in the Ukraine, have caused inflationary pressures throughout our economy.

As a business owner, you have no doubt felt it as almost everything costs more than it did a year ago, or even a few months ago (except, apparently, dental insurance, because reimbursement rates to dentists seem to be mired in quicksand).

While the prevailing economic theory is that a very small amount of inflation is a positive factor, larger amounts of it create the possibility of “runaway inflation” where price increases in one business casue everyone else to raise their prices, which results in additional price increases downstream. Increases in energy prices are a great example of something that can make almost everything in our economy cost more. And when workers see their buying power eroding, they seek higher wages, and similarly, everything in our economy has labor as one of its ingredients.

Inflation also erodes the wealth of savers and investors. Seniors can be particularly affected.

Those of you interested in history will know that runaway inflation wrecked the German economy after World War One, and this was a major factor in the rise of Adolf Hitler to power.

When central bankers see the possibility of out-of-control inflation, there are a couple of levers that they can pull. The first is to increase the cost of borrowing. This tends to encourage people to put of major purchases like houses and cars, and also rewards saving over spending. The hope is to reduce something the economists call “aggregate demand” and cools off the economy. As some industries contract, it may also result in unemployment, and if done too aggressively, may tip an economy into recession. The goal with inflation is to bring it back to a 1-2% annual level and not to push the economy into “deflation” where prices actually fall.

The second lever that the Federal Reserve Bank can pull is to reduce the “money supply.” This is normally done by changing the capital ratio required of banks. Doing this means that each bank can lend less money than it previously could. When borrowing gets more difficult, this also has an anti-inflationary effect.

How the storm unfolds

Particularly with housing, falling prices can cause a cascading effect, where people find themselves “underwater” when the value of their house sinks below the amount they have financed. This can prompt house sales and further depress the market. We saw some of this in the last big crash in 2007 or so.

Increasing interest rates normally cause the stock market to fall when fixed-rate investments like bonds become relatively more attractive compared with stocks.

So what does all this mean for your practice? Here are a few considerations:

  1. The staffing crunch we are feeling right now will probably ease. By how much depends on how successful the managers of the economy are at walking the tightrope between controlling inflation and dropping us into recession
  2. While dentistry has often been touted as being recession-proof, the profession has evolved from a disease treatment model to one of addressing elective issues for patients. These patients are likely to become more cost sensitive as their finances get pinched. Treatment that is viewed as “elective” will probably fall off considerably in most practices.
  3. Dentists who have borrowed on floating interest rates are going to feel what happens next more than those who locked in their borrowing rates.
  4. Providers of patient financing like CareCredit may end up tightening their lending criteria.

And what strategies should a dentist employ to prepare for a possible recession? Here are some ideas:

  1. This probably isn’t the best time to be making major elective purchases. Borrowing costs are high, and trending higher. Also, some big-ticket items (houses are a good example) are likely to fall in price as a result of the Government’s actions.
  2. As patient financing tightens up, and as some people lose their jobs due to recessionary layoffs, this is probably a great time to look at setting up a dental membership plan. There are several good options out there.
  3. You are undoubtedly hearing from staff that their buying power is eroding and that they would like to be paid more. Giving big raises to staff may set you up for disaster if demand for dental services falls off drastically and you are locked into higher wages. One possibility is to offer some form of profit or revenue sharing in lieu of wage increases. This can allow you to address current staff needs but with downside protection if revenue falls.
  4. Good communication with patients becomes particularly important in times like this. Being prepared to discuss lower-cost treatment alternatives, to provide some in-house financing, and to allow people who are struggling extra time to pay you are all tools that can be employed to help struggling patients.
  5. Economic volatility creates more situations where people can become desperate, so this is a time when practice owners need to increase their vigilance for embezzlement.

Like every economic phase, this recession too will pass. Most of us emerged from the Covid crisis battered but still standing, and we hope that whatever storm happens next in the economy can be dealt with as well.

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