I just read an article from CNN that said “About three-quarters of all Americans think the economy is now in a recession”. I decided to write this post because even though 3/4 of all Americans beleive that we are in a recession, I bet that less than 10% actually know what the definition of recession actually is.
What is a recession?
The economists’ definition of a recession is two consecutive quarters of negative GDP growth. There hasn’t even been one quarter on negative GDP growth. This is not to say we are not in a recession now. It is impossible to tell when the recession has started until well after we are in it. This is because it takes a long time for the GDP reports to come out so we don’t know until after it has already happened. A lot of times the end of the recession is a few months after it has been identified.
What does this mean to me?
1) Bad for investors– When in a recession (which by the way I think we are), the stock market usually performs very poorly and often times goes down. This is a bad time to be holding large portions of your assets in the stock market. Generally speaking it is a good idea to move your investments into a safer assets like quality bonds or commodities. Personally, I have already done this. For the past two years, I have put $4,000 into my roth IRA. A few months ago when I saw the signs of a poor economy coming, I moved the whole balance into a money market fund.
2) Good for investors-For the savvy investor a recession can be a great time to make some great returns. Since many stocks have taken a beating lately, they are starting to look more and more attractive. Personally, I still believe we have a ways to go before the recession is over. I do try to read as many financial articles as possible to try to keep up with where the economy is. I always pay attention when I read an article about where Warren Buffet is placing his money. He is the epitome of a savvy investor and I know I want my money to be in the same place as his.
3) Good for borrowers– A recession can actually be good for people in debt. This is because of inflation. I am sure you all have noticed the spike in gas prices which has pretty much cause the price of everything else to go up with it. Well, when this happens it causes something known as inflation. Inflation causes your money to be worth less than it was before the inflationary period. This is good for borrowers because now the debt they owe is worth less and will cost them less to pay back to their creditors. No, I am not advocating getting into debt, but this is one good thing that can come out of a recession for those in debt.
4) Bad for everyone– A recession can lead to loss of jobs, tightening up of credit, and inflation. Generally speaking, this is bad for everyone. Now is a good time to “play it safe”. I don’t recommend: yelling at your boss, buying 3 new cars all on credit, leave work early etc. If you happened to lose your job, it could be tougher than normal to find another.
It seems that George Bush seems to be one of the 3 out of 4 Americans. Directly following this post, there is a video of Bush admitting that the economy is starting to look bad, even though we have had record job growth(says him). He pretty much sugar coated it so much that you forget that they economy is doing bad.