24/7 Wall St.

Later Friday morning, the University of Michigan will release its preliminary September reading of U.S. consumer sentiment. The consensus estimate calls for a slight increase from August’s final consumer sentiment index reading of 89.8 to 91.0.

August’s final index represented the largest month-over-month drop (down 8.6 points) since December of 2012. Consumers now are worried about the effect of tariffs and that is affecting their spending. If Americans don’t spend, the overall U.S. economy will grow more slowly, raising the specter of a near-term recession. What are the odds of a recession? What do U.S. businesses think will happen? How will they react?

Independent auditing and tax firm Grant Thornton has surveyed more than 250 business owners and C-suite executives representing companies with $250 million to $3.5 billion in annual revenues, seeking to discover if they expect a recession, how they are preparing for one and how they will respond if and when a recession comes.

Chris Stephenson, national managing principal of Grant Thornton’s Financial Management practice, commented:

Business models have changed significantly [since the last recession]. Some companies will have to relearn some hard lessons, but what’s clear is [that] they don’t intend to just retrench and try to ride it out. Most are counting on continued investment in technology and innovation to push them through.

A solid majority of survey respondents (62%) expect a recession in the next 18 months. Nearly a quarter (23%) do not expect a recession within the next two years. Executives of publicly traded companies say interest rate hikes are the most likely recession triggers. Privately held companies point to shifting regulations, including trade and tariff changes, political uncertainty and availability of credit as potential recession triggers.

Companies expect to invest in strategic technologies to help get them through the next recession. The two major areas of investment are better inventory management (36%) and customer data-tracking (43%). These innovative technologies were not widely available a decade ago, and companies see these investments as insurance policies to mitigate the effects of another recession.

Respondents were mixed in their replies to how a U.S. recession would affect spending on international plans. Nearly half (42%) said they would increase investment in international expansion while 30% said they would spend less. Nearly three-quarters (73%) said the disintegration of multilateral international agreements are the biggest risk to short-term performance in the event of a recession.

Grant Thornton’s chief economist, Diane Swonk, said:

A financial crisis cannot be ruled out, but could be averted. We need to join forces with our allies to use peer pressure to bring China in line with the rest of the world. That means harnessing multilateral efforts instead of bilateral trade agreements. Multilateral negotiations at this late stage in our political cycle are a heavy lift, given the upcoming 2020 elections.

Regarding employment levels, survey respondents were nearly evenly split on how they would change headcount: 35% said they would hire more workers, 33% they would cut workers and 32% said they would make no change. Nearly half (47%) of companies posting revenues of up to $500 million expect to spend more to retain their workers compared to about a third of larger companies.

Nearly half (43%) say they plan to follow Baron Rothschild’s advice to buy when there’s blood in the streets by ramping up investment in mergers and acquisitions (M&A) in the event of a recession. Just 37% of privately held companies expect to expand their M&A activities, while 51% of publicly traded companies plan to expand if a recession occurs.

Another area where companies plan to spend is cybersecurity. More than half (55%) said they would boost investment in cybersecurity if a recession is imminent.