Cioffi: How would tire industry fare in a stress test?

Have you ever had one of those tests where the doctor sticks a bunch of sensors on you and puts you on a treadmill to see how your heart handles the strain?

Federal Reserve regulators just completed a similar "stress test" of 23 large American banks. Instead of a brisk jog, though, they simulated a major recession, with 10% unemployment and a collapsing stock market.

Despite big projected losses, all the banks survived this "severely adverse scenario" with enough capital to continue functioning and supporting the U.S. economy. They passed the test.

It got me to thinking that we need a stress test for the tire industry, to see how prepared we are for a downturn in the business cycle. But first let's check the economy's latest vital signs.

Economic indicators remain mixed. In fact, you can cherry-pick data to support any narrative you want to spin, good or bad. Politicians must love it. For those of us with real jobs, it means continuing uncertainty.

And speaking of jobs, employers created 209,000 in June. That's down from 306,000 in May, and 370,000 in June of 2022.

On the other hand, the unemployment rate fell slightly in June to 3.6%. So even though hiring is slowing, there's still no sign of major trouble in the labor market.

Meanwhile, first quarter annualized economic growth is increasing with each revision by the Bureau of Economic Analysis (BEA). First it was 1.1%, then 1.3%. Now BEA says it was 2%. That's the final number — no more revisions— and it indicates an economy that isn't strong or weak, just middling.

Inflation seems to be cooling, with May's Consumer Price Index rising only 0.1%, after a 0.4% rise in April. Unadjusted inflation for the past 12 months is only 4%. Nonetheless, most believe Federal Reserve policymakers will raise interest rates at their next meeting July 25-26.

In the tire and rubber industry, employment is mainly trending sideways. All occupations in rubber product manufacturing dropped to 135,700 in May, down from 135,900 in April, but up from 134,900 in May 2022. In tire manufacturing specifically, employment increased to 48,700 in May from 58,600 in April. One year ago, it was 58,200.

One of the more pessimistic numbers I've seen lately is that Chapter 11 filings by U.S. businesses increased 68% in the first half of 2023 compared to the same period last year (source: Epiq Bankruptcy). That's across all industries, not just tire and rubber, but as a general indicator it's sobering, because bankruptcies are now at their highest level since 2010 (source: S&P Global Market Intelligence).

With the economic data so mixed, I've been advising hiring managers to be active and stay a step ahead of the business cycle, but many have asked me how. The best approach is to game different economic outcomes — especially a recession — and imagine how your business would be impacted and how you would respond. That's where our stress test comes in.

Here's the scenario. It's 2024, and a major recession has hit. Unemployment is 10%. In the U.S. tire industry, total employment has fallen to 45,000 due to layoffs and consolidation.

Now ask yourself these five questions:

1. Which employees at your company will be most essential even as revenues are squeezed?
2. Which positions could be downsized, at least temporarily?
3. Can remaining employees take on duties from those who may be laid off?
4. Are there cost-saving measures — such as flex staffing or more efficient training — that might lessen the need for layoffs?
5. How will you keep the work environment positive and employee morale high until conditions improve?

No one can tell you if you passed this stress test, but if it gets you thinking, that's the point.

If a recession does occur, you will need to discuss options with the C-suite and defend your ideas.

Until then, keep up with the economic and industry data, as well as what is happening with your competitors.

Downsizing or closings may create opportunities to pursue exceptional workers who are suddenly on the market.

I want to end with an optimistic note about recessions. They are when the economy prunes itself back so that new growth can begin.

The people and firms who position themselves best will be part of that growth.

So regardless of where the economy goes from here, don't be discouraged. Even in down times, there will be opportunities to make good decisions. Be ready to take advantage of them.

You can reach Mike Cioffi directly at [email protected].