Brace yourself, America. What if the already terrible economy gets even worse? And not just a little bit worse, but a lot worse? Look at it this way: If you put a group of brainiac economists together in a room and told them to create a computer model of a Great Depression 2.0, the key ingredients would probably be a) plunging stock prices, b) collapsing home values, c) soaring unemployment, and d) a banking system on the verge of complete implosion.
And do we have all those terrible factors in play today? Check, check, check and check. But there are also some big positives to counterbalance those huge negatives, such as a Federal Reserve that is lowering interest rates and printing money, as well as trillion-dollar government plans to stimulate the economy and keep people in their homes.
But things can get a lot nastier without reaching a total Great Depression scenario where the economy shrinks by 25 percent and unemployment soars by 25 percent. So just how bad might the economy get? And if there is a mini-depression, what should you do about it? Your questions, our answers.
Give it to me straight--where's this economy heading?
There are some positive signs out there. Really. A highly respected economic model from the Federal Reserve Bank of New York predicts the recession, already 16 months old, will end this year. And White House economists are predicting a strong rebound over the next three years. But many private forecasters are far gloomier, predicting tepid growth going forward for several years and unemployment rising to at least 10 percent next year and staying elevated. This is the "long recession" scenario, similar to what happened in Japan after its real estate and banking crisis in the 1990s. Certainly, the battered stock market is giving few signs that investors see brighter days ahead. Research by Harvard University economist Robert Barro has found that big market drops raise the probability of an outright depression, defined as a GDP drop of 10 percent or more. As Barro concludes: "The stock-market crashes of 2008-09 in the United States and other countries provide ample reason for concern about depression."
[See why some investors are growing worried about Obamanomics.]
How can I keep my job?
Workers are spending an average of 2.8 hours each day worrying about job security, according to a recent survey. Here's a tip: worrying about it won't save it. This downturn is your cue is to stick your head out and become a somebody: lead a project, suggest an overhaul, work overtime, and develop relationships at work. If you're stuck in a job with little upward mobility, the best career move may be to head back to school while the opportunity cost is smallest. "It's time to take that hit," says Peter Morici, an economist at the University of Maryland. Just get a degree with obvious payback at a good institution: "Go to a school with brand loyalty among employers in the region where you want to find a job," Morici says. If you're out of work but not interested in going back to school, you may best survive the recession by taking a job at a lower pay grade. While on the hunt, consider offering to work part-time for free in an industry you're hoping to learn, suggests Katy Piotrowski, author of The Career Coward’s Guide to Career Advancement. Free work is a boon to a struggling company, and you'll only add to your skills, your resume, and your contacts.
My home has already lost a lot of value. Can it really fall much further?
Home prices at the national level have already plunged nearly 27 percent from their 2006 peaks, and Richard Moody, the chief economist of Mission Residential, expects values to drop another 10 to 15 percent before bottoming out in the middle of 2010. Although he's not predicting it, if the ongoing recession evolves into a full-blown depression, home prices could fall an additional 25 to 30 percent on top of that, Moody says. That's because a sharply higher unemployment rate would pull many would-be buyers out of the market. At the same time, the dysfunctional credit markets associated with a depression scenario could prevent many buyers with sufficient incomes and solid payment histories from obtaining mortgage financing. The result: "more significant drops in sales, prices and construction," Moody says. If so, more folks will be checking out the government's new foreclosure prevention plan, especially if your debt-to-income ratio is above 31 percent, and your mortgage is more than your home is worth.