If you’ve looked at the news lately, you’ve undoubtedly heard whispers about the US economy heading into recession. You may have also heard that it may not be headed for a recession. You may have heard that leading indicators are sending misleading messages about the health of the economy and what we can expect to see in the coming months. It can be boring, but a few things never go out of style: activism and preparation. Since none of us have a crystal ball, and even if we did, it would probably only be useful as a paper weight, instead of spending our time on the hamster wheel of speculation, we turn our attention to actionable We can turn to the steps that we can take. To help us prepare now to capitalize on the opportunities presented during the recession.
Before we begin, let’s assume that the definition of a recession is two consecutive quarters of negative GDP growth. We’ve seen 19 recessions in US history, from the Panic of 1797 to a giant recession caused by land speculation in 1873, the Great Recession of 2008 due to additional speculation in the US railway system (also likely due to overvaluation) . Recessions occur as part of the normal economic cycle, and while no two are alike, there are quite a few similarities. Following are some observations.
Point One: Recession is part of an open economy. First, we have the issue of semantics. We need to change the question to ‘what if we have a recession?’ For a statement, ‘What to do when we have a recession.’ Open economies (not run by the central government) follow a four-part business cycle:
, troughat the bottom of economic activity, then
, Expansionwhere the economy grows rapidly, then
recession, or contraction back into a trough
This cycle is an essential feature of an open economy. The question is not ‘if?’ but when?’
Point two: The Fed usually raises rates before a recession. The existence and purpose of the Fed is two-fold; this is a double mandate: “To promote economic conditions which achieve both stable prices and maximum permanent employment”. Achieving stable prices means controlling inflation. In the Fed’s toolkit, raising interest rates is one tool to help rein in inflation. In eleven of the twelve recessions since WWII, the Fed began raising rates before the start of the recession. This did not happen only in the pandemic-induced recession of 2020.
There have been about two modern ‘soft landings’ where the Fed raised rates, and subsequently released gas to honor its mandate without a recession:
Inevitably, rising rates will reignite inflation, and in the process, shrink the economy, usually with corresponding recessions.
Point three: what happens during a recession. There are some characteristics of the post-WWII recession that are fairly consistent:
A recession usually precedes or corresponds to a fall in the stock market. If we don’t consider the 2020 recession (exception), which included a meteoric fall and growth caused by the pandemic, we can see that in each of the last 11 recessions, the stock market fell, on average – 30%:
The recession has been accompanied by a decrease in economic activity, especially capital expenditure by businesses (CAPEX). Companies cut expansion to survive.
Recessions are usually accompanied by an increase in unemployment. Companies cut down on employees to save costs.
R&D and technology spending slows down.
Interest rates tend to fall in the short run.
What to do before recession What steps need to be taken now to help you find opportunities in a recession?
- check the bowel
- lean up
- take dry powder
- check credit
- Consider Waiting on Large Purchases
- Invest: Go Shopping
- Sharpen your skills and build your network
Do a gut check. Analyze your complete financial picture: assets and liabilities, income and expenses. Now is the time to review, or create and execute a financial plan. orphan property? Investment out of balance? Are all legal documents in order? Bought insurance and suits your circumstances? If we have a recession, you’re going to want to focus on other things than trying to save on your car insurance. Check out these items now.
lean up. Make a budget now. Keep in mind three possible scenarios of what we might call the ‘Clint Eastwood’ approach: the good, the bad, and the ugly. What would cash flow look like if all else remains the same? (Good). What if the cash flow drops by 20-25% (bad). 40% (The Ugly). Work on all three scenarios with your family unit.
Take dry powder. Recession bargains. They can be stocks, real estate or simple consumer goods. It can present itself as a business opportunity or tool. Many of us can say ‘I wish I had bought’x“Back in 2009.’ Try building up some cash reserves right now.
Check credit. Credit strengthens in times of recession. your check credit score Now he. Make any necessary corrections. Line up your home equity line of credit now. Banks are less likely to lend in a recession, so prepare yourself first, maybe even borrow now and keep the income in a safe place.
Consider waiting on large purchases. As mentioned above, recessions lead to bargaining. Holding onto large purchases will have two effects: saving cash and potentially setting you up for a better deal later.
Investment: Go shopping. As we mentioned above, every stock market has declined after the WWII recession. The interesting thing is that the downtrend usually starts before the recession. Look for quality companies in essential businesses. You want leftovers, so look for the best.
Saw sharpen your skills. This is important despite the recession. Companies lay off employees in recessions, do what you can to make sure it’s not you. What skills can you add? What Makes You More Marketable? Who should you network with? How do you become more valuable?
ground level: Recessions are part of the economy; One of the best things you can do is accept it, and be proactive in doing what you can to be prepared. All of the above considerations are solid advice in any type of economy, but especially in and before a recession. Keeping a budget, improving skills, or creating a financial plan are good ideas, in good times and in bad. As always, I will try to answer questions. My e-mail is [email protected]
Credit: www.forbes.com /