Navigating Human Resources Through Inflation/Contraction

Despite election year gloom and doom assertions, GDP in the second quarter of 2022 was revised higher and consumer sentiment moved up a bit as well. Q2 corporate profits rebounded (rising 6.1 percent in the quarter, after falling 2.2 percent in Q1), headline and core inflation moderated slightly, and two new regulations (the Inflation Reduction Act, and an executive order to forgive student loans) were signed, aimed at helping companies and households.

Notwithstanding this, 81 percent of company leaders expect a recession, while the labor market remains very strong. While more people are rejoining the workforce, more workers could ease labor shortages but also create more demand, stoking inflation.

This mixed picture, combined with the Fed’s stated intention to get the inflation rate down to 2%, which is likely to take several years, the private sector seems to be entering a new era of “higher for longer” interest rates and cost of capital (Alan Blinder of Princeton University notes that of 11 rounds of Fed tightening since 1965, one lasted three years, most lasted from one to three years, and only one was over in less than a year. All but three resulted in an official recession, and only one qualified as what Blinder calls a perfect soft landing.)

Companies will need to draw on a long-term strategy for success in a world of slower growth, higher inflation, and more expensive capital. That’s a big switch from the activities of the past several months, when many management teams have been putting out fires, so to speak—finding fixes for problems like rapidly rising costs for raw materials and labor. Companies should also be thinking about more structural solutions that not only manage costs but also build resilience and can drive long-term value creation. Here we offer four themes that business

On the revenue side, McKinsey found that the median analyst expects the trend (materials and commodities up, consumer companies down) to persist and EBITDA margins to decline in all but a handful of industries. Not only do analysts expect that consumer-facing industries will face pain, but they also expect that this pain will ripple through most other industries as well.

The same McKinsey report recommended a four-part strategy that will require leaders to build new strengths, two of which directly impact and provide opportunities for HR:

• Sustainability: Staying the Course
• Supply Chain: Rebuilding for resilience and efficiency
• Growth as a priority

Outperforming executives break the powerful force of inertia by prioritizing growth, a choice that shapes behavior, mindset, risk appetite, and investment decisions across the organization. In the past in times of recession cost-cutting often meant personnel cuts. If a company is serious about finding and developing smart growth opportunities, it is likely that staff will need to be expanded and redeployed. As a strategic partner it will fall to Human Resources to locate the best and most needed talent as well as looking internally for opportune talent changes. Training and development, often unnoticed as a prime HR function will come into new prominence.

• Talent: Closing supply–demand gaps. Even in this environment, many companies are still hiring. But talent pools in many industries are drying up as employees quit to enter other sectors, go after nontraditional opportunities such as gig-economy work, or leave the workforce altogether.

Leading companies are taking several approaches to strengthen their workforces. Many have sought to motivate workers with more meaningful assignments and better opportunities for career advancement. Often, these approaches go hand in hand with training in skills that are hard for companies to find. Human Resources, again as a strategic partner should look for long-standing policies that need to be discarded or changed. For example, requirements for education and relevant experience may need to give way to hiring people who are ready to learn and have unconventional backgrounds, come from other industries, adjacent majors, overlooked colleges and universities. It will be up to HR to streamline their hiring processes and enhance candidate experiences to attract more applicants and lift conversion rates.

Evidence also suggests that improving workers’ emotional experience on the job can do more for retention than employers might expect. McKinsey surveys of managers and employees found that employers often fail to understand just why workers leave their jobs. In particular, employers tend to overrate “transactional” factors such as pay and development and underrate the “relational” elements—a feeling of being valued by managers and the organization, the companionship of trusting teammates, a sense of belonging, a flexible work schedule—that employees say matter most. Companies that successfully create this kind of meaningful purpose can benefit from greater organizational cohesion and resilience.

The key here is for HR to move from an ancillary process to claiming a place at the table in the C-Suite and to participate actively in creating a long-term strategy for recruiting, retention, and training/development that will allow their company to create opportunities for growth and expansion rather than contracting and waiting for the storm to pass. The current combination of long-term inflation, the possibility of recession, and changing demands of the workforce can be an unprecedented opportunity for those bold enough to seize it.

Attracting and retaining top talent in this new environment as well as sorting out great candidates from the merely adequate can be a difficult process, particularly for companies with an outdated relationship with their Human Resources program. A relationship with a recruiting firm that understands and stands for the company’s purpose and its support of employees’ personal purpose is likely to produce the best results. An effective recruiting partner will partner with HR to identify the right combination of skill and experience to find the top candidates and to convey to them what is the hiring company stands for.

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