“We’re preparing for the worst.”

Notes from Nick

A quick recap of the key topics on digital agency owner’s minds.

Climb on down from that cliff… at least for now.

I had a somewhat strange request last week. A webdev shop owner contacted us for some help with modeling and scenario analysis. This was strange because no one does that. We’ve never had a client go “ya I’d love to pay you to build me some elaborate financial model and run some base-case, bear-case, bull-case scenarios…”

So this instantly got me on a call to find out what was up. It turns out, they’re expecting a recession and they’re going all-out to prepare for it. Not just any recession though, they’re expecting another 2008 The Great Recession-style of recession.

This fascinated me. Was there something I’m missing? Is the economy blowing up? Are agencies doomed?

A bit of background might help here.

​

In the beginning

Promethean Research actually began life as an economic research consultancy. A lot of our early work was around development economics, feasibility studies, and… recession modeling. We even published a quarterly recession barometer piece that gave clients a sense of where we were in the business cycle.

We transitioned out of economic research and began focusing on digital agencies full-time around 2016 after we noticed a serious lack of research and data-backed strategy for digital shops. However, we still pay attention to a select group of economic indicators. We use them, combined with sector and industry trends, to guide shifts in client strategy.

This helps us make more informed calls on things like

“How much cash should we hold in reserve?”

“How should we adjust our positioning?”

“How aggressive should we be growing?”

So when I heard that this shop was prepping for a massive recession it came as a pretty big shock. Here’s why:

​

Our outlook

We have a basket of indicators we watch to gauge the health of the U.S. economy. One of the big ones is consumer spending levels. The U.S. consumer is responsible for almost 70% of GDP, so watching for changes in consumer behavior helps us understand a good portion of the economy. Consumer spending, as measured by the BEA’s Personal Consumption Expenditures, remains healthy.

​

​

In addition to solid consumer spending, business investment in equipment, software and other productivity enhancements increased 6.8% Y/Y during the first quarter of ’22.

​

There are risks

The biggest risk to consumer spending right now is the high rate of inflation we’ve been experiencing. This inflation risk has so far been offset by strength in the labor market (low unemployment rates and rising salaries) which has allowed the consumer to continue to spend in spite of the record-high inflation.

However, the Federal Reserve raised its target rate back in March and then again in early May. Additional rate hikes are expected and if those combine with continued inflation, the hit to the consumer could be significant.

There are also continued supply chain issues throughout the globe that are being exacerbated by Covid lockdowns across China. Consumers can’t just be willing to buy, there must be things there for them to buy. A slight offset to this could come in the form of catchup-demand in service consumption since that’s still running a bit below trend.

​

What about the trouble in tech!

Tech hiring got frothy over the last few years and we’re seeing some mean-reversion there in the form of layoffs at sizable firms. Crunchbase has a great list. Along with layoffs, we’ve seen a huge pullback in VC investment in the first quarter. While we don’t expect this to drop salaries back to 2020-levels, it should stem their growth.

​

What’s all this mean?

Recession risks are increasing but we don’t believe we’re nearing some huge recession cliff like back in ‘08. The big risks come from lower consumer spend brought on by continued inflation and supply chain disruptions coupled with raising interest rates. These point to more of a slowing vs. a crashing.

In the tech space, the layoffs there could help digital shops that have had trouble hiring. Even if agency employee growth expectations come down from the ~30% Y/Y they were back at the beginning of the year, many shops are still understaffed.

​

Digital shops should plan for more cautious growth

Expect some chop and increase cash reserves. A few newsletters ago we talked about how much cash a shop should have on hand. Six months ago, it was <3 months of OpEx for most shops. Our outlook now pushes that to the 3–6mo range. Again, the right number will depend on your risk tolerance, outlook, and individual agency dynamics. We aren’t expecting anything catastrophic, but the massive growth of the last few years appears to be slowing. There’s no need to “plan for the worst” just yet.

​

​

Researched Resources

A curated list of recent articles from around the web and some thoughts on their topic’s impact for your industry.

• Here’s a great high-level look at current ecommerce penetration rates and potential by industry. Something that surprised me over the last few years is the amount of support work necessary to enable ecommerce elegantly. Everything from supply chain maturity to customer support processes need to be in place and tuned to support ecom vs. B&M. Seems like an opportunity for those offering ecommerce to add in support-enablement services as well.
• May 2022’s US Supply Chains and Inflation Report offers clarity into what is driving consumer caution. The impacts of price sensitivity and supply chain struggles can inform creative solutions for strategic growth.
• ​Everything is an ad network by Mobile Dev Memo highlights the major shifts happening in the ad world and the potential opportunity these changes bring.
• Establishing a reflective practice is critical for managers looking to maintain high-impact. This list of 35 Impactful Questions Managers Should Ask Themselves Regularly can cultivate the awareness needed to our teams and companies well.

​

​

Digital Agency Benchmarking

Understand your shop’s performance across 16 core metrics that are critical to measuring the health of digital service firms.

​

​

​