Recession Schmession!

If you open a newspaper or turn on your TV you are bound to see a report on our pending recession. It seems like all you see or hear are stories about our terrible gas prices, the declining housing market and the unstable stock market. It’s no wonder that us Gen Xers seldom read the newspaper or hardly ever listen to the news. If you are anything like me you are asking yourself, “Who cares”.

Until a few years ago I couldn’t even begin to tell you what a recession really was and further what it actually meant to me. My goal for this article is to demystify the meaning of the terrible “R” word and provide you with some solid knowledge of what this really means to you.

So what is a Recession?

A recession is defined by a decline in GDP (Gross Domestic Product) for two or more consecutive quarters. This is the classic definition but is one that is universally disagreed upon. Many economists argue that this definition does not take in effect many different variables that are ever changing in today’s economy.

Ok, so what is GDP?

GDP is simply the sum total of all goods and services produced by the United States. You can deduce that when the GDP is high the economy is thriving and when the GDP is low the economy is in flux.

A recession is determined by the National Bureau of Economic Research (NBER). The NBER is a committee that determines if we are in a recession by taking a look at unemployment rates, wholesale and retail sales volume, industrial production, and income factors. According to the NBER a recession lasts approximately one year.

I recently went to an insurance convention in Texas. One of the guest speakers happened to be an amazing finance professor at Tulane University. In one short hour I learned more about our economy and finance than I think I learned in my entire MBA!

According to the professor the simplest way to define a recession and perhaps the most accurate is when company profits are declining across the board. The great thing is that you don’t need to be a financial expert to take notice of such a trend. Just keep your eyes and ears open and you’ll be sure to spot a recession on the rise.

History of Recessions

Remember the dot com bubble burst? Were you laid off or a part of a company that crumbled? That was the last US recession which ran from March 2001 to November 2001, according to NBER.

You can blame that recession on 9/11 and fear that it generated in the US economy. Remember the massive interest rate cuts by the Fed? This was an effort by the Fed to shorten the recession. Good news is the recession was short and shallow; bad news is that these efforts led to the Subprime mess that we are now facing.

Below is a listing of historic recession periods in the US:

• November 1948- October 1949
• July 1953- May 1954
• August 1957- April 1958
• April 1960- February 1961
• December 1969- November 1970
• November 1973- March 1975
• January 1980- July 1980
• July 1981- November 1982
• July 1990- March 1991
• March 2001- November 2001

Do you notice any trends? First, they all seem to last the better part of a year in length. Second, recessions seem to occur fairly frequently, until the 10 year gap between the last two recessionary periods. Third, three of the fourth last recessions have been very short contrary to history. Fourth, two recession periods were caused by “oil shocks” when oil supply was low and consequently prices rose sharply. And finally, the recession in 1981-1982 was the longest in history since WWII.

What Does This Mean To Me?

Rule number one is to take what the media and newspapers are reporting with a grain of salt. Most agree that we are not in a recession, but many economists could debate that for days. The question is what this really means to me in everyday terms.

According to Villanova economics professor, David Fiorenza, below is a list of wonderful things that you can look forward to if a recession does occur.

• You might have trouble getting a loan for stuff like houses and cars. During a recession banks become nervous and tighten their reins on lending money, particularly to young people.
• You might lose your job or miss out on a bonus or promotion. A recession usually means that corporate profits are down because consumers begin purchasing less and less. If the mucky mucks aren’t making money, guess what, you aren’t going to be making money either.
• Your gas and utility bills might increase. As oil and gas prices increase so will your bills for these items. We are already at $4.00 a gallon gas, just how worse can it really get?!
• Your investments might lose money (this is a great time to take a look at your 401K/IRA and make any necessary fund changes).
• You can say bye-bye to your luxurious vacation plans. Odds are if all of the above items begin to take place your discretionary money will begin to dry up.

So as you can see, yes, a recession does have an impact on you. Just about everyone is affected by a recession in one way or another.

My advice during these unstable times is to keep your discretionary money close, be on the lookout for deals and steals when you need to purchase big ticket items, and carefully monitor your investments. The good news is a recession typically does not last long and our economy has a stellar track record of bouncing back better than expected.

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