The Dreaded ‘R’ Word: Recession

February 15, 2008 – 10:33 am

When speaking of financial matters, recess is not a word you want to come up in the conversation. Growth and expansion are the type of terms you want to hear. So, should the average investor be worried when there is all this talk of a “recession” in today’s U.S. economy? In a word, no. I’ll tell you why.

Are We Even in a Recession?

The always-accurate Wikipedia* defines a recession as “a downward trend in the rate of actual GDP growth”. What exactly does this mean? Well, contrary to what you might believe it means, an economy in recession is not shrinking. It is just not growing as fast as it should be. So, armed with the proper definition, we can ask the scary question: is the United States macro-economy recessing? Absolutely.

There are a couple of key areas that are contributing to this phenomenon. First up is the real estate market. This is one area that actually is shrinking in some areas. In once crazy markets like most of California and Portland, Oregon, home prices are falling faster than Roger Clemens credibility. The economy was booming 18 months ago, leading mortgage lenders to be too optimistic in issuing loans. If you were breathing and could sign your name you could get a house loan, even if you couldn’t beat an orangutan in a game of tic-tac-toe. Poor judgement by these lenders has led to the current sub-prime mortgage meltdown that is certainly a major factor to the overall economic recession.

The second factor is decreased consumer spending. The interesting point here is that the decrease has stemmed from fears about the decline in the real estate market. It goes to show the tremendous domino effect present in complex markets. People realize their home is worth less than it was a year ago and they become worried. Other issues such as rising inflation and unemployment only fan these flames of worry, and people spend less on big screen TVs and iPhones.

Keep Your Head on a Swivel

So, should you be worried? If you make your living trading stocks and looking for day-to-day profits in the market, you might lose some sleep over the next couple months. I recently wrote that this slight downturn can be spun optimistically for retirement investing as long as you keep a rational mindset. Buying indexes and stocks when they are down is obviously the smart play when you know they will grow over a 10 year time horizon.

Remember this the next time the evening news mentions an economic recession. Maybe the ‘R’ word isn’t so dreaded after all.

* May be inaccurate in some cases

Tags: clemens is as guilty as barry, investing, personal finance, real estate, stock market