Here's how to weather the downturn and take advantage of the tough times in 2009.
So you think it's bad news that a recession has been "officially declared"? (Turns out, it started back in December of last year.) Puh-lease. First of all, it shouldn't be news to anyone that the economy has been in the tank for a while. Unemployment has been climbing (from 4.4 percent in March 2007 to 6.5 percent now), and the stock market has been plummeting (down roughly 40 percent so far this year). Ouch!
Second, the recession announcement by the National Bureau of Economic Research can be a handy catalyst for action. Now that there's not a shadow of a doubt that the economy is terrible, you can look ahead to 2009, make smart plans to weather the downturn, and—if you're savvy—figure out how to take advantage of the tough times we'll be facing all next year:
The economic outlook. Oh, it's going to be nasty out there. Not so nasty that your great-grandparents will quit telling those Great Depression stories, but bad nonetheless. For a while, economists thought we might luck out and get away with a downturn no worse than the 1990-91 recession. That one lasted eight months, with back-to-back quarters of negative GDP growth of 2.9 percent and 2 percent. Unemployment rose from 5.2 percent to 7.8 percent. But now it looks as if the 1981-82 downturn is the better comparison. It lasted 16 months, had several quarters where the economy shrank 3 percent more, and saw unemployment rise as high as 10.8 percent. So what about the recession of 2008-2009?
Weakening big picture. There have been two quarters so far during the recession where the economy has gotten smaller, each time by less than 1 percent. Those days are over. "We are currently forecasting a 4 percent decline in real GDP in the fourth quarter, placing it among the worst quarters for economic growth in the postwar period," says Jason Trennert of Strategas Research. The first three months of next year could be just as bad. And even once the economy begins to grow again, the overhang from the credit crisis will probably crimp significant growth until until 2010.
Worsening unemployment. It's the sharp jump in job losses that really pushed the NBER to make its recession call. And things only seem to be getting worse. "Current conditions in the economy are terrible," notes IHS Global Insight economist Brian Bethune. "Employment continues to go south, the unemployment rate is ramping up sharply, and households are seeing their net financial worth evaporate before their eyes on a daily basis." Economists say that an 8 percent unemployment rate is likely—and 10 percent is not out of the question. Even worse, more people without jobs will make it that much tougher for the housing market to rebound anytime soon.
Sickly stock market. The stock market often begins to perk up about three to six months before the end of a recession. But economist Michael Darda of MKM Advisers says the time to buy has yet to arrive. "We don't expect the current recession to end until late 2009, which means equities may not put in a durable bottom until the first half of 2009."
Tight credit. Since the housing bubble started to unravel, credit card companies have been cutting credit limits and, in some cases, raising interest rates, partly because they fear more consumers will default as financial stress spreads. "We haven't hit bottom yet in terms of credit card companies trying to protect themselves," says Justin McHenry, president of IndexCreditCards.com. Even if the Federal Reserve continues to hold down interest rates, McHenry says credit card companies will probably raise rates and cut credit limits through early 2009. That means people who have credit cards with decent rates should hold onto them, because they might not find a better deal elsewhere.
Food prices may drop. After spikes in the prices of milk, eggs, and other staples earlier this year, shoppers may be in for some relief in 2009. The price increases were partly caused by the high price of gasoline, which is used to transport much of our food. Now gas prices are dropping, leading some analysts to expect lower supermarket prices. But it won't happen overnight, because the cost of diesel is still high, and farmers need to recover from the high input costs they faced over the summer.