By FPA member Jeanne Gibson Sullivan, CFP®
Last Updated: September 19, 2011
There is a lot of speculation about whether the U.S. will experience a “double dip” recession and what we should do to prepare if it happens again. First — what is a recession? Since 1978, the Business Cycle Data Committee of the National Bureau of Economic Research (NBER) has had the distinction of making the official call on whether or not the U.S. economy is in recession. The pronouncement is made on historical data, so the official call is often not made until many months later. For example, in December 2008 the NBER announced that the economy peaked in December 2007 a full year earlier. The June 2009 trough, when the economic decline hit its low and started to turn, was not announced for 15 months, until September 2010.
The financial press often states that the definition of a recession is two consecutive calendar quarters of declining economic production, called “GDP” — gross domestic product. However, the reality is that NBER uses a variety of indicators to determine whether we are (or have been) in a recession including statistical data on economic production, income and employment.
Entering the fall of 2011, many people believe that either we are in a recession now or we are headed for a “double dip” recession, which is a second recession within a short period of time after the most recent recession. Unemployment remains stubbornly high, the housing market is still dismal and the most recent economic data reports that while the economy is growing, the growth rate is very slow. However, just because it “feels” like a recession does not mean the economy IS in recession or will necessarily experience a double dip. Slow recovery is still recovery and hopefully the economy will improve. But it is likely that we will experience other recessions during our lifetime, and the official statement that we are in a recession, won’t come until it is too late to prepare.
So what can be done to prepare for recessions? Much like the weather, some people bear the full brunt of each recession and others seem to be unscathed. For those who want to be prepared, the best course of action is to go back to the basics:
- Emergency Fund: Make sure you have cash set aside for an emergency or in case of job loss. For some people it may give them comfort to have sufficient funds on hand to pay for expenses for even a year or more, especially if layoffs are possible. It may take years to accumulate such an emergency fund, but build it slowly and steadily.
- Budget: Examine your budget to determine what is really necessary and what can be cut now or could be trimmed or cut if need be.
- Hard Decisions: For those who have been unemployed for a long period of time, it may not be as simple as cutting your cable or cell phone bill; it may be necessary to make some very difficult decisions, such as to sell your home, even in this tough real estate market. Try to be objective about your financial situation and set your emotions aside.
- Portfolios: Pullbacks in the stock market are a frequent and normal occurrence, albeit unsettling. Invest in stocks for your longer-term goals — not for your emergency fund or a college fund for a child nearing high school graduation. Resist the temptation to sell when the market takes a dip.
- Stay Calm: The economy moves in cycles; even for those who suffer the greatest impact a calm, patient outlook and persistence will see you through.
It is impossible to predict whether the economy will continue its slow growth or slip into a double dip recession, but with proper planning (and a bit of luck), you can be prepared and weather the storm.
FPA member Jeanne Gibson Sullivan, CFP®, is a financial planner and owner of her own financial planning practice Financially in Tune in Wakefield, MA.