Recession? What To Do When Things Slow Down

The definitely slowing U.S. economy has garnered most of the financial media coverage recently, as it sputters and lurches forward. 

Think of the sum total of the goods and services output of the U.S. -- the Gross Domestic Product (GDP) -- as a huge business.  ALL businesses experience cycles of growth and pullback as they grow, some businesses more than others.  Lots of reasons may contribute to our country's periods of economic softness, including higher interest rates, credit or lending standards tighten, consumer confidence drops, and increasing raw material costs.  Hey, even presidential election years often cause economic slowdown because investors are uncertain as to the candidate's policies that may take hold next year. 

To be in a classic "recession," the gross domestic product has to have declined for six or more successive months. Our nation has been fortunate enough to have steady economic growth now for almost seven years. Our last real bump in the road was in early 2001; however, as a result, we didn't see a peak in the unemployment rate until 2003. To complicate people's understanding of a recession, you can also have what's called a "growth recession." That's when unemployment rises but the overall economy continues to sputter along. Likely, at best, we are in a growth recession right now. You may also hear the term "misery index" being tossed around, which is the rate of inflation plus the rate of unemployment.

It's very challenging to deal with both high inflation and high unemployment at the same time. Typically, the government has to create stimulus to get the economy flowing again. To help, the Federal Reserve may flood the market with money (tax credits or incentives, lower interest rates, etc) or the federal government may create job programs.

While we've had a great run economically, there are a lot of indicators suggesting that we'll have some difficulties in the immediate future. Some analysts suggest it may be looking up by the middle of 2008, but I believe it will linger a bit longer, perhaps into 2009. 

So here's my advice: If it looks like a storm is coming, it's your job to get your umbrella.  Clean up your financial house to deal with the rainy days that may come. What matters is strengthening your foundation.  Do it and you'll make it through in the best shape possible.  Here are my “Big Four” recommendations:

1. 1) Get on a priority-based budget where you’re living on less than you make. In other words, hunker down financially and make sure your income exceeds your outgo.
2. 2) Put off any big purchases, especially those requiring debt to fund them. Stop borrowing now!
3. 3) ASAP, save up one or two thousand dollars in an emergency savings account before you begin paying off debt.  If you experience job loss or a financial crisis, you'll be able to survive it.  If you believe that your job is in jeopardy, make only the minimum payments on your debts and build a larger emergency savings to get you through.
4. 4) Begin paying off debt aggressively, focusing on the smallest one first while making minimum payments on the rest.  This approach will give you the most encouragement while paying down your debt.  It's staying power to complete the job that matters most!