How to Spot a Recession (and Ride It Out)

Don't panic: Stocks have already taken a hit, and a downturn can create new opportunities.

Recession chart
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The "R" word. It's been tossed around freely this year as Americans endure a slowing economy care of spreading troubles in the housing market. In actuality, gauging the onset of a recession is an inexact science. As with that old Supreme Court standard for pornography, you know a recession when you see it. Right now, that means a weaker job market, meager income gains, shaky stock markets, and uncertain business and consumer spending. Here's a recession primer.

Is the U.S. economy in a recession? Possibly. Financial media normally refer to a recession as two back-to-back quarters of negative real growth. Meanwhile, the official arbiters of recession at the National Bureau of Economic Research define it as "a significant decline in economic activity spread across the economy, lasting more than a few months."

By that standard, recession could be here already. Gross domestic product grew a paltry 0.6 percent during the fourth quarter, and measures like the Institute for Supply Management's factory index now show contraction. It can take more than two years for a recession to become "official" as revisions to economic data are tweaked by the NBER.

More important are recessionlike symptoms including those mentioned above, plus a jobless rate that's edging up amid signs of slower consumer spending. Last week, legendary investor Warren Buffett said the United States is in a recession "by any common-sense definition" of the word.

How bad will it be? If 2008 is indeed a recession year, most economists still expect the downturn to be mild. A late-1970s-style malaise mixed with the sort of soaring inflation that plagued the economy through the early 1980s is unlikely. But this time, still-unresolved credit issues combined with wary consumers could easily make this slide worse than the last recession in 2000-2001, when the bursting of the tech bubble halted the economy. On average, postwar recessions have lasted about 10 months.

Should I sell my stocks? If, like most Americans, you're a long-term investor, the answer is no. Equity returns over five-, 10-, or 20-year spans outperform most other investments. Donald Luskin of Trend Macrolytics notes that average annual returns in the S&P 500 have been almost identical during both expansions and recessions. Plus, bailing out after the market has already drop ped this far means you're likely to take bigger losses. In short, don't panic.

If you're determined to trade, consider more stable, diverse investments, including foreign firms, blue chips with foreign exposure, or index funds. In general, when markets are this volatile, the pros can profit, but part-time stock pickers are at a real disadvantage. "For the average investor, they should use this as an opportunity to keep making regular contributions to their 401(k). Dollar cost averaging is a huge weapon in the long run," says Jeff Schappe, chief investment officer at BB&T Asset Management.

Should I buy a house? Prices in many markets are falling, of course, and while buyers need to be as careful as ever about speculating, those in for the long haul can find some great buys. It's critical to research sales of comparable homes, remodeling records, and other data available at sites like Zillow and Trulia. Buyers are in short supply and may find they can dictate the terms of a deal: Agents may be willing to cut commissions, sellers may agree to cover repairs or other costs, and contractors eager for work might lower their fees for home improvements.

What can I do to protect my job? Boost your market value. Lois Frankel, an executive coach and author of Nice Girls Don't Get the Corner Office: 101 Unconscious Mistakes Women Make That Sabotage Their Careers, cautions that this isn't the time to ask management for perks like the abandoned corner office or a better title. "It's a little ghoulish," she says. But volunteering to take on new responsibilities can pave the way for a negotiation in six to eight months, when an employee can prove that the job has evolved and is now worth more on the market. It can also build an employee into a more attractive candidate for a job outside the company.



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  • Kirk Shinkle

    Kirk Shinkle is a senior editor for U.S. News Money and manages the Best Funds portal. Follow him on Twitter @KirkS or email him at kshinkle@usnews.com.