(This article is an updated version of a 2018 Next Avenue story.)
Here are two safe forecasts, the kind you can count on. First, the U.S. economy will sink into a recession. Second, no one knows when the recession will arrive. Taken altogether, these two “forecasts” have critical implications for managing your finances.
But first, let’s look at the economy.
Growing numbers of financial analysts and economists are becoming worried that a recession is getting closer. The chief reasons: President Donald Trump’s trade war with China and a slowing global economy. U.S. Gross Domestic Product (GDP) slowed to 2.1% in the second quarter, down from 3.1%.
David Rubinstein of The Carlyle Group private equity firm recently told CBS This Morning: “So, we’re due for a recession and I think there are signs that we are going to head into one, but you can’t know for certain until you are actually in it.”
What you can do is examine your personal financial circumstances and make appropriate adjustments.
Nevertheless, the unemployment rate is just 3.7 percent and wages have been growing, albeit slowly.
What ‘The Next Recession’ Worriers Are Worrying About
So what is the recession-is-coming crowd focusing on? The consensus expectation is that the economic boost from the corporate tax cuts will fade in coming quarters. The GDP numbers so far don’t show the administration’s promised surge in business investment, the kind that leads to higher, sustainable growth. Instead, as the economy shifts into lower gear, it will be vulnerable to a stumble or unexpected shock — with government, business and consumers debt at nosebleed levels. Meantime, the Chinese economy is showing signs of stress, and growth is faltering in most developing nations.
“Though the world economy is still experiencing a lukewarm expansion, growth is no longer synchronized,” Nouriel Roubini, an economist at the Stern School of Business at New York University known for forecasting the bursting of the housing bubble before the Great Recession, has written. “Economic growth in the Eurozone, the United Kingdom, Japan, and a number of fragile emerging markets is slowing. And while the U.S. and Chinese economies are still expanding, the former is being driven by unsustainable fiscal stimulus.”
Concerns Over a Trade War and Interest Rates
Roubini and many other economists are deeply unsettled by the prospect of a spiraling trade war, which could hit the U.S. hard.
The yield on 10-year Treasury bonds was recently lower than the yield on 2-year Treasuries, which has worried some economists, too.
Preparing Your Finances for the Next Recession
How should you organize your finances considering the uncertainty about prospects for a recession?
You can’t get rid of the uncertainty. Nor can you control the timing of the business cycle or the direction of the stock and bond markets. What you can do is examine your personal financial circumstances and make appropriate adjustments.
In essence, take advantage of today’s mostly good economy to prepare for the inevitable bad economy — whenever that occurs. Fact is, barring an unexpected global shock, the growing economy gives you time to plan ahead at least sometime into 2019, if not longer.
Don’t let a good economy go to waste.
“You really have to ask yourself about contingencies,” says Meir Statman, professor of finance at Santa Clara University and author of the Finance for Normal People: How Investors and Markets Behave.
Ross Levin, a Certified Financial Planner and co-founder of Accredited Investors Wealth Management in Edina, Minn., says you should think about how a downturn could affect your finances and take actions accordingly. “How will you be personally impacted? Calibrate where you are at now,” he says.
Jobs, Credit and Savings
Let’s say you are contemplating changing jobs because of the healthier job market. It might be a good idea to accelerate the shift so you can get well-established at your new place of employment. Another savvy precautionary step is to stay in contact with your network of former colleagues, friends and acquaintances just in case a layoff lies in your future. People typically find work through their networks these days, not online job boards.
If you might need a line of credit at some point, apply now, when banks are flush and looking for business. Financial institutions are reluctant to offer credit lines during recessions.
Similarly, you’ll want to pay down debts and increase savings if you can. See where you might cut back on spending now to put more away for a potential emergency and for your retirement. Similarly, try to erase your credit card debt and increase payments on your mortgage and car loans so you won’t be saddled with debt if things turn south for your finances.
“You want to shift your spending by choice,” says Levin. “You don’t want to make a forced decision in a crisis.”
I’d also suggest running scenarios to see what you would do if you lost your job or suffered a pay cut. For example, if you’re in your 60s, at what point might you file for Social Security to bring in income? In your 50s, how long could you go without a steady income?
“You want to be prepared,” says Statman.
As for your retirement savings portfolio, you might want to reduce your stock holdings and increase ownership of bonds and cash — scaling back the amount of risk for peace of mind.
If you’re in your 60s and already making withdrawals from retirement savings, you might want to lock up extra cash in safe savings so you’ll have money easily available to pay for a year or two of bills if necessary.
Learning From Warren Buffett
Take a tip from Warren Buffett, the 87-year-old investing maestro. In his annual letter to Berkshire Hathaway shareholders last year, Buffett noted that his company doesn’t carry anywhere near the amount of debt it could afford. He and Charlie Munger, his 94-year-old investing partner, prefer to “sleep well,” he said. “We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including extremes such as market closures.”
Buffett is referring to a company, of course, but his insight holds for households, too. Will you sleep well when (not if) the next economic recession arrives? Now is a good time to shore up your personal safety net.
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