Today we’ll cover the current economic conditions, what they mean in the grand scheme regarding the next recession, and how they have the ability to impact your personal bottom line.
Oh, how the economic indicators are signaling the next recession
Alarm bells, sirens… you know the drill. All signs are pointing toward a recession, and unlike a year ago, now we have some estimate on when the next recession will hit. But first, the indicators:
The Yield Curve – here’s what normal looks like
The yield curve shows you that when you loan money to the U.S. Government (via buying Treasury bonds), what interest rate you should expect to receive based on how long the term of your bond is. In the example above, if you buy a 5-year bond, you should expect a 2.9-ish% interest rate.
The curve almost always slopes up and to the right (e.g. the longer term the bond, the better the interest rate).
Here’s what an inverted yield curve looks like:
See the dip in the middle?
This indicates that the 3-5 year treasury bonds will yield a smaller percentage rate than the 6-month bonds.
And that means that the economic forecast for 3-5 years down the road includes clouds and thunderstorms.
Oh, and the next recession…
Every inverted yield curve does not result in a recession. However, every recession is preceded by an inverted yield curve. And when recession follows an inverted yield curve, it’s on average 18-months later.
We’ll come back to what we can do now to prepare in a bit, but first another indicator.
The time since our last recession
For those of us around and coherent during the last recession, we don’t have to think too hard to remember some details. But if the starting date has slipped your mind, the Great Recession began in December of 2007.
And those 10+ years since represent the longest economic expansion (improvement) in modern history.
In a phrase… we’re due.
Markets (had been) soaring and consumers are spending at record rates
Recessions don’t happen because the general public is bracing for impact by saving much and spending little. On the contrary, a recession typically follows a period of high consumer spending.
You can see that consumer spending typically rises with time, but that being said, it’s increasing at a quick rate. Which is normal to see before an economic downturn.
So with the indicators… indicating, here’s how a recession typically impacts the average person
- Changes in your work life – some people lose employment altogether while others will have pay or hours adjusted
- You’ll spend less money less often – vacations are delayed or put off, we buy generic, and some luxuries go away
- It can impact the family dynamics – I know we’re supposed to ‘keep it in the family’, but when economic pressures mount, many families can be disrupted
- Retirement is delayed or severely put off – we saw this in the last recession when the large nest egg that folks once had was incinerated due to the market taking a dive and the individual investing in the wrong funds at the wrong time
Here’s how we can best prepare to weather the next economic storm
We don’t have to just sit here and take it…
Here’s what you can do to prepare for the next recession now:
1- Dust off and polish up the resume and pitch letters. Also – start expanding your network
Be proactive rather than reactive. To combat the fact that you have the potential for less or no work once a recession hits, start getting yourself and your resume out there now – before things get bad.
Reach out to old connections now before the market is flooded with people calling in favors, and start setting up additional income streams now – from the comfort and stability of a steady paycheck.
2- Save, save, save!!!
Whether you’re a business or just a personal finance individual, it’s vital to build financial security by saving during the good times so you can weather the lean ones.
Expenses come up and a nice cushion in your savings account can mean the difference between riding it out and an economic disaster.
3- Reduce your fixed expenses
You know, those automated expenses that leave your bank account almost as fast as your direct deposit comes in? Well, cut some of those costs, start employing some of your old frugal tips, and it may be time to start distinguishing between a need and a want.
4- Meet with your financial advisor to make sure your investments reflect your goals and values
I do not fancy myself a wicked-smart financial investor, but I’ve got a knowledgeable professional friend for that. And at our regular sit-downs, I’m constantly lobbing questions to make sure our investment goals line up with our long-term values.
This way, I don’t have to live and die with the market’s every whim, and I can ride out the down times knowing that it’s all part of the larger plan.
To sum up our plan for the next recession
Market’s don’t go up forever, baby… Part of the natural ebb and flow of typical market fluctuations does include the ebb (or the flow – whichever one of those means “down” or “bad”…??).
So let’s use that information and recognize the mounting evidence telling us that the next recession is forthcoming (at some point), and let’s prepare ourselves and our bottom lines for the downturn.
While times are still good, dust off the resume, get yourself out there, save up, cut costs, and make sure your investment strategy aligns with your goals.
This way, if the worst should happen, you don’t need to make reactionary changes – your plan is already in place.
(Photo courtesy of Dan Brooks)