In February, former Federal Reserve Chairman Alan Greenspan said it is “possible” that the U.S. economy might go into recession by the end of the year and that the country’s ongoing economic expansion had produced signs that the current cycle is coming to an end. If Mr. Greenspan and those indications are correct, what might we do to protect ourselves against the potential ravages of a recession? First, here’s a look at current indicators in the marketplace that suggest a recession in the United States is imminent.
Housing Market Slowdown
One cause of worry is the weakening housing market. The National Association of Realtors forecasts that existing home sales will decline 4.6 percent this year, up from its previous forecast of 2.9 percent. New home sales forecast by the NAR were expected to plummet even further for the year—by 18.2 percent against the association’s previous estimate of 17.8 percent, according to a June 7 article in the Chicago Tribune. Although Greenspan noted in February that the declining housing market hasn’t shown any negative effects on the overall consumer market, it is hard to imagine that the flood of foreclosures will not have some negative effect on the health of this market.
Rising Gasoline Prices
June marks the beginning of another hurricane season, and there is growing concern about the already nettlesome issue of an unusually high number of refinery outages in the spring, as reported by the Associated Press on June 7. A large number of U.S. oil refineries are located along the Gulf Coast, a hurricane-prone area. In September 2005, the wrath of Hurricane Katrina shut down oil and gas production from the Outer Continental Shelf in the Gulf of Mexico, the source for 25 percent of U.S. crude oil production. While the refineries are up and running again, gas prices that rose as a result of the closures have not returned to pre-Katrina levels.
Iraq War Toll
According to the National Priorities Project, the cost of the Iraq war will surpass $456 billion if Congress passes legislation to approve additional spending for the war. A total of $378 billion already has been spent. While Iraq’s monetary costs have significantly weighed down the country economically, the emotional toll on the country as U.S. troop casualties surpass the 3,500 mark cannot be overlooked.
Increasing Consumer Credit
According to a May 2007 U.S. Federal Reserve report, U.S. consumer credit increased much more than the expected $13.46 billion in March as Americans loaded up on credit card debt, closed-end car loans, vacations and education. If there is a recession, the inability to pay down this increasing debt will exacerbate the negative effects of the recession.
Declining Auto and Retail Sales
The slumping housing market, increasing consumer debt and gas prices surpassing $3 per gallon have had a negative impact on the auto industry. Both Ford Motor Co. and General Motors Corp. have reported decreasing sales since April of last year, with Ford experiencing a decrease of 12.9 percent and General Motors 9.5 percent between April 2006 and April 2007. The same factors have kept many consumers away from stores. Wal-Mart Stores Inc., J.C. Penney Co. and Federated Department Stores Inc. have all reported slower sales since April 2006.
While all of the above paint a bleak picture for the U.S. economy in the near term, the following signs suggest a more positive outlook:
- Cleaner corporate balance sheets. In the wake of the accounting abuses that brought down such corporate giants as Enron Corp., Tyco International Ltd., Global Crossing Ltd. and WorldCom, companies have cleaned up their financial statements and have employed more conservative reporting strategies.
- Increased focus on the war in Iraq has spurred debate about the effectiveness of the U.S. military presence and increased pressure on the government to produce a more concrete plan for the war’s execution. Vice President Dick Cheney’s recent visit to Iraq was largely seen as an effort to force the Iraq government to take a more active role in solving that country’s problems, indicating a possible shift in the Bush administration’s opposition to withdrawing U.S. troops.
- Economic growth remains on the upswing globally, with many countries, including Vietnam, Brazil, Japan and Germany, reporting increases in their respective gross domestic product, or GDP. The GDP measures the value of a nation’s annual output of goods and service. Growing economies overseas, coupled with the relatively weak value of the U.S. dollar that makes it cheaper for countries to purchase U.S. goods, spell good news for U.S. export revenues and for investment in the United States by overseas entities.
- U.S. jobs data released by the Department of Labor on June 1 show that wages increased by 3.8 percent in the past year. When factoring in an increase in the Consumer Price Index of 2.6 percent in the same period, we see an actual increase in “real” wages of 1.2 percent over the past year.
The Merits of Education
Whether economic circumstances are positive or negative, individuals always have the ability to control their own financial destiny. We can exercise that control by acquiring adequate insurance coverage for our families, using consumer debt judiciously, increasing savings for a “rainy day” and investing within our communities.
More important, the merits of education cannot be overlooked for their impact on our financial well-being. The June 1 jobs data reflect a direct correlation between unemployment and education. The report shows that as the level of education rises, the rate for unemployment decreases. Moreover, census data show that the higher one’s level of education, the more income one will earn during his or her working life. A master’s degree, for example, is worth $1.3 million more in lifetime earnings than a high school diploma.
Although many of the unfortunate circumstances in which we find ourselves cannot be foreseen, we can state with some certainty that we will encounter at least one financial or other upheaval during our lifetimes. Education can help us to prepare for such upheavals. In addition to educating ourselves about the best financial strategies for our own circumstances, we can make the pursuit of formal higher education a goal for our families and ourselves. Consider the following:
- How would you survive financially if your employer gave you a layoff notice today?
- What would happen to your family and loved ones if you unexpectedly passed away, or if you became disabled and could no longer work?
- Are you preparing for the increased costs of college for your children?
- How much will you have to “downsize” your life style when you and your spouse retire?
- The bottom line question, however, is: Will you have the formal and the financial education required to respond to an ever-changing economy, or will you become a victim of the economy?
Ryan Mack is founder of Optimum Capital Management L.L.C. He can be reached at email@example.com
By Ryan Mack