Recession or Depression?

Gary — Thu, 10 Jul 2008 14:37:00 GMT

What's the difference between a recession and a depression?
Which one are we in now?
Is it possible that the other will happen?
Thanks, Carrie

Perhaps an article on the definition of a recession would be helpful. Love the Stretcher, but you seem to accept that we are in a recession. Not by
the numbers - not yet, at least. We are experiencing inflation. But maybe not a recession. Time will tell. Just makes a great website and
newsletter look less than stellar when you buy in to the conventional wisdom instead of stating facts...
Jennifer

Carrie & Jennifer,

Let's start with the facts. A recession is when the economy shrinks for 2 consecutive quarters.A depression is when the economy shrinks by more than 10%.

So far we have not even had 1 quarter where the economy has shrunk. So we're not in either a recession or a depression.

It's possible (likely?) that we'll go into a recession. We haven't had even 1 quarter of economic decline since Q3 2001 (9/11) and no recession since before 2000. So it's remarkable that we haven't had one before now. Based on past economic cycles we are long, long overdue.

As to forecasting the future? That's something that I really don't think I can do.

Do I buy the 'conventional wisdom' that we're already in a recession? No, I really don't. I think that the media will always promote a potential crisis. It helps them to keep readers/viewers and to make money. You'll never see a big headline saying "Everything Is OK". That doesn't sell newspapers or keep TV watchers from reaching for the remote. In fact, I get bugged when they hype a recession that doesn't exist. Frankly, they've got a lot of people scared who don't need to be.

But just because we're not officially in a recession, that doesn't mean that we shouldn't discuss being prepared for hard times. Even when times are good. Just like the Boy Scouts we believe in being prepared. For a job loss, unexpected illness or other unexpected expense. That's just being smart in my book. We've been encouraging people to save for a rainy day since we started in '96. I've been telling individuals the same thing back when I was a financial planner for the last 25 years. It's always been good advice.

Does that make us look like we're going along with the 'conventional wisdom'? Perhaps. But, that's really not the motivation.

It's important for us to remember that not everyone is in the same place in life. Some of our readers are doing just fine. Sure, they're not happy about higher gasoline or bread prices. But, paying for them won't break their budget.

That's not true for everyone. Some folks are really struggling with the higher gas prices. They can hardly afford to drive to work. Others may have lost a job or faced a sudden illness. For them it doesn't matter whether the economy is in a recession. Their family is in a recession. And, that's all that matters to them.

It's our job to try to provide tools for those who need them and are willing to use them. That means that we'll probably always pay a little more attention to the black cloud instead of looking at the silver lining. Personally I tend to be an optimist. But I think that being prepared for the worst actually gives you more freedom to be optimistic about the future. Instead of worrying about it, you know that you've taken appropriate steps.

That really would make a good motto. "Expect the best, prepare for the worst." (I googled it and find that it's attributable to Zig Ziglar - it does sound like something that he'd say). But, it's good advice. Especially for those of us who want to be in control of our financial futures.

Keep on Stretching those Dollars!

Gary

Preparing for Recession

Gary — Wed, 23 Jan 2008 15:40:00 GMT

Lately it seems everyone is talking about a possible recession (or even a depression). When the Federal Reserve drops rates by 3/4% between meetings it's probably time for all of us to take notice. No one knows for sure whether we'll end up with a recession or not. But, as we all do know, it's always better to be prepared for financial challenges. Just in case.

The first thing is to know what your current position is. Are you spending more than you're making? Do you even know? Where does your money go each month? The only way to really find out is to track your spending for a month and compare it to your income. Don't forget to include items that happen just a few times a year (property taxes, auto insurance, etc). If you are working you should be making more than you're spending each month. That extra money can be used for paying down debt or building an emergency fund.

Next, pay down debt. It's easier to survive a job loss if you don't have a lot of bills each month. Now is the time to reduce credit card balances. Even it it means taking a second job or cutting off cable television. You'll be tempted not to do anything. Just remember that if you do lose your job it will be too late.

Look for big savings items. With lower rates now might be the time to refinance your home or car. Compare insurance rates. Make sure that you really can afford the house or car you're paying for. Typically if your house is over 40% of income or your car is over 20% you need to do radical surgery. That means moving to a cheaper home or car.

Take a serious look at your food/grocery/eating out expenses. Most people spend 15 to 20% of their money on food. But, it's real easy to spend more. And, it can happen a little at a time. That luscious $4 dessert won't bankrupt you by itself. But, it will take you one step further from your goal.

Look at your employment situation. If you're honest with yourself, it's not that difficult to recognize job troubles ahead. Is your employer in trouble? Is the whole industry suffering? Could your job be done by someone else for much lower pay? Either within the U.S. or without? Does technology threaten your job? If you can answer 'yes' to any of those questions, you'd be wise to consider what your life would be like without your present job.

Ask yourself if you'd be likely to find the same type of work at a different employer. It could be that your field is changing. That happened to me. If you're facing a similar situation begin learning a new trade now. Don't wait until you lose your job. Waiting will only make the transition longer.

No, I can't say whether you'll be affected by a recession or if there will even be a recession this year. But I can tell you that you'll be better able to handle one if you begin preparing now.

The Dollar Stretcher : recession

Recession or Depression?

Preparing for Recession