Author Topic: Wall Street Journal: What a Recession Could Mean to You  (Read 2901 times)

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Offline CactusCarlos

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Wall Street Journal: What a Recession Could Mean to You
« on: January 22, 2008, 07:42:42 PM »
http://online.wsj.com/article/SB120078173684203245.html?mod=hps_us_inside_today

By GREG IP
January 20, 2008

A recession in 2008 isn't official yet. But with unemployment rising and stocks falling -- including a 4% drop in the Dow Jones Industrial Average last week -- many economists, including former Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Lawrence Summers, say the U.S. is probably in a recession.

What does that mean exactly? And what does it mean for investors? Here are answers to some key questions.



Q: What is a recession?

A: Business cycles are made up of periods of economic expansion and recessions, when the economy is contracting. The generally accepted arbiter of when U.S. recessions begin and end is the "business cycle dating committee" of the 87-year old National Bureau of Economic Research, a non-profit group based in Cambridge, Mass., that is made up of 600 academic economists.

The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months," and usually visible in measures such as gross domestic product, employment, incomes and industrial production.

A popular rule of thumb says a recession is two consecutive quarters of shrinking GDP, although that doesn't fit some NBER-designated recessions.

Q: Are we in a recession or about to enter one?

A: We won't know for sure unless the NBER announces it, and that would likely be long after the fact. (It did not decide the last recession began in March of 2001 until November of that year.) So far, GDP has yet to shrink.

But there are some things that are common to most recessions that are present now: a drop in the stock market, long-term interest rates falling below the level of short-term rates, and a decline in housing activity. Goldman Sachs says the unemployment rate, averaged over three months, has always risen at least 0.3 percentage points before or during a recession, a threshold that was crossed last month.

But there are some indicators that are not flashing recession. Employers have not trimmed employee work weeks, as they commonly do if demand for their products has tailed off. Initial claims for unemployment insurance have actually dropped so far in January.

Perhaps most important, inventories are not unusually high, which makes it less urgent for manufacturers to scale back production.

Q: If it's a recession, how long and deep will it be?

A: According to the NBER, there have been 32 recessions since 1854, lasting an average of 17 months. Recessions have gotten shorter and less frequent since 1945, averaging just 10 months. And the two last recessions were among the shortest and mildest on record; both the 1990-1991 downturn and the 2001 recession lasted just eight months.

One reason recessions are less severe now is that traditionally a major cause of declines in GDP and employment has been manufacturers' need to reduce excess inventories. Over time, manufacturing has shrunk as a share of GDP and manufacturers and retailers now have better control over their inventories thanks to just-in-time supply-chain management.

Recessions from 1945 to 1981 were principally caused by the Federal Reserve raising interest rates to suppress inflation, which then undermined demand for houses and cars. This time around, the Fed did not raise rates very high, and home construction has already fallen by half since the housing bubble burst in 2006. That suggests a lot of the potential damage to the economy has already been done.

Even some of the economists who do expect a recession think it will be mild. Goldman Sachs argues, for example, that employers trim their payrolls nowadays mostly through attrition rather than layoffs, which will soften the blow to incomes.

One area of concern, though, is that housing prices are declining nationwide, which hasn't happened on a sustained basis since the 1930s. As home values decline, households may cut back on spending, and the most overstretched borrowers will likely default. Loan defaults in turn weaken the health of banks and other lenders and may lead to further restrictions in credit. This could make the recession severe.

Moreover, the fallout of the tech bust in 2001 was cushioned by the boom in housing that followed. No sector is an obvious candidate to provide the same degree of relief now.

Q: If it's a recession, how will stocks perform?

A: Stocks usually start to fall before a recession begins, as investors sense that economic activity and thus corporate profits are about to turn down. Prices often bottom out before a recession ends, as investors sense that the excess inventories or the glut of unsold homes that led to the recession have been resolved.

The turnaround usually occurs once the Federal Reserve shifts its priority from battling inflation to supporting growth, and cuts interest rates.

Charles Reinhard, director of portfolio strategy at fund manager Neuberger Berman, compared how stocks performed in previous periods when the Fed began cutting rates. In all but one of the past 11 rate-cutting cycles (including several when a recession didn't materialize), the Standard & Poor's 500-stock index has risen -- advancing an average 17% in the 12 months after the Fed starts to cut rates.

The exception was 2001: the S&P 500 was still down 12% 12 months after the first Fed rate reduction. Mr. Reinhard says that's because the market started out so overvalued relative to earnings then.

Since Sept. 18, when the Fed started cutting rates, the S&P 500 is down 13%. It's down 15% from its October peak. If pre-2001 patterns hold, that suggests the next eight months could end up being good for stocks.

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Offline Lauri

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Re: Wall Street Journal: What a Recession Could Mean to You
« Reply #1 on: January 23, 2008, 12:16:36 PM »
it could be a good time to buy stocks... yes, it definitely could.

this is the low point... THIS is where you jump in, if you can safely do so.

dont do anything stupid to play the market.. cause its a long term thing, not a short term fix.


Offline Freeper

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Re: Wall Street Journal: What a Recession Could Mean to You
« Reply #2 on: January 23, 2008, 08:05:11 PM »
Well so far the recession means I am unemployed.
I may not lock my doors while sitting at a red light and a black man is near, but I sure as hell grab on tight to my wallet when any democrats are close by.