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Business Needs a Better Way to Predict the Next Economic Downturn

Experience and intuition only go so far. To make smart decisions, all business leaders must turn to data—about our competitors, about our pipeline, and about the health of our economy today and tomorrow. But not all data are created equal. And the most reliable economic indicator is something we don't traditionally turn to: how businesses are spending money today.

For my entire career, I've looked for economic indicators I can trust. If a recession is looming, I want to know as soon as possible so I can ensure my company's stability and continued growth. And if the coming months ahead will be strong for the national and global economies, I want to know that so I can put more dollars into expanding our offerings, hiring top talent, and investing in marketing to increase our pipeline.

In the early 2000s, I worked for Siebel Systems, then a rapidly-growing Fortune 500 company with 70% market share in customer relationship management software. Our CEO was able to examine his sales pipeline data, which had been growing at a record quarterly pace for many years before abruptly slowing, to predict the dotcom bubble bust. Not only was he able to warn of a coming recession, but he was able to get ahead of it a month before it started.

Still, there were shortcomings to that approach. It relied on salespeople to put accurate data into our database about their potential deals, and it only provided visibility into one segment of the broader software industry.

As business leaders, we cannot use our sales numbers to predict the health of the entire economy, so we are forced to use indicators that fail us time and again. Today’s leading indicators are insufficient. For example, the stock market is based on earnings estimates and expected future growth, not actual earnings, and can be artificially inflated by the government. Other leading indicators tell us about the creation of goods, but not when they are actually purchased. So we turn to lagging indicators, such as reports on the GDP, to help provide insights in which we can base business decisions. But while GDP it is a decent indicator of the current health of the economy, it does not tell us where the economy is headed.

To try to solve for this, economists look at a number of factors to try to predict future economic health. Among them: tax revenue, satellite data of a country's nighttime lights, overall electricity consumption, even maritime trade. But it's still imperfect data based on past behavior or human confidence in future performance. And business leaders will find little excuse for failing to see and get ahead of a downturn that threatens their companies.

What if we had access to a data set based on how businesses are behaving? Perhaps we might find that companies in a given industry, or even across industries, are reducing spending or lengthening approval times. If we could see how companies are spending—and not how they plan to spend—we might be able to more accurately predict economic health.

It starts with collecting spending data. Here's the good news: Today's cloud-based technologies that help businesses manage their spend can also "see" behavior as it happens. Add a few machine learning capabilities to the mix and we might have a way to make a prediction.

Even the fiercest competitors typically reluctant to share data are willing to share spending information if it’s anonymized and aggregated at scale. So long as there’s a clear value exchange, we’re evolving as a society to willingly share information anonymously.

At Coupa, we want to help businesses do better and learn from others. Our core belief is that none of us is as smart as all of us. So we explored a leading indicator based on behavior, rather than opinions or lagging data. We reviewed billions of dollars of spend transactions and tested our hypothesis that business spend is an effective leading indicator. Factoring in several quarters of spend data, we see that spending behavior correlates with future economic growth. We call the result our Business Spend Index.

We could have kept this data to ourselves, but we believe it’s important to be open and share our data to help other businesses. Without an accurate leading indicator, businesses tend to hoard cash and do not invest fully in growth. If a recession looms, businesses will be unable to properly adjust their spending, leading to hasty and painful decisions that are far from strategic and ultimately hurt the broader economy. With a more accurate leading indicator, businesses can play offense and not defense.

As business leaders, we have an obligation to our employees and constituents—but also to our larger economic ecosystem—to scrutinize how we make decisions. Let’s ask ourselves if traditional indicators are still relevant. It’s time to think differently about historical indices and have the courage to embrace a new way of predicting the next downturn.

Rob Bernshteyn is CEO of Coupa Software, a cloud-based business spend management platform.