Recession and Businsss Planning: Questions for MBA Students

I'l be speaking to a class of MBA students this afternoon, and I'll begin by posing the following question:

You're CEO. Your division heads are preparing budgets and plans for 2012. You gave them guidance mid-summer, saying use a middle-of-the road view of the economy. And you gave them a link to a survey of professional economists. That survey showed an average forecast of GDP for 2012 of 2.6 percent, better than the estimated figure for this year, but not strong enough to make anybody feel good.

(There's good reason to use such a survey. Over time, averages of forecasts are better than any single forecaster. Also the Philadelphia Fed survey is free, which is a very good price.)

So your management team has worked up plans that they will present at next week's planning meeting, but you've just seen these figures from a Wall Street Journal survey of economists:

Risk of Recession

Now what do you do? In answering, note that the risk of recession is less than 50-50. Also note, however, that the risk is pretty big.

Note to reader: this is a good time to pause and think.

It doesn't make sense to base your plans on a recession whose probability is less than 50 percent, but neither can you ignore such a big risk. For a suggestion on how to handle this, read this blog post about recessions and business planning.