No official declaration yet, but anecdotal evidence points to a global recession. Clearly not good news, as recessions portend jobs losses, less spending, perpetuating the economic slowdown. But recessions do offer opportunity for growth and profit longer-term.
What Happens to the Employment Picture?
Job losses accelerate during recessions as companies cut costs by reducing labor forces and cutting production. Some vacant jobs will not be filled while other positions will be eliminated through attrition. The best, most valuable and visible talent will be retained and rewarded. Buyout and retirement packages may be available to those losing jobs. Others may finally choose to follow a deferred dream, whether by volunteering or starting a new hobby or business venture. Education and training assists the rotation out of old economy jobs such as manufacturing, and into new technology jobs such as alternative energy. That rotation is a long term positive for the economy by improving overall standards of living at reduced costs.
What about Consumer Spending/Saving?
As recessions takes hold, spending slows, demand declines and prices retreat until they become low enough to curb supply or rekindle demand. Crude oil prices have fallen 50% from all-time highs reached during the summer of 2008 as consumers purchased more fuel-efficient vehicles. According to the U.S. Department of Transportation, Americans drove 11 billion fewer miles so far this year, the first decline since 1979. Cambridge Energy Research Associates notes demand for gasoline peaked in 2007 with high gas prices crimping purchases. Prices of electronics and toys have tumbled, making it easier to find deals and lifting hopes for the holiday shopping period, as consumer spending on discretionary items has ceased.
Recessions also underscore the importance of saving as opposed to spending. The recent action of global central banks has made even the most basic of savings vehicles safer than ever, as the Federal Reserve buys into financial institutions, expands investor protection to include money market accounts and non interest-bearing accounts, and increases the amount of funds covered per bank account to $250,000 from $100,000.
Where are Interest Rates Headed?
The usual response by central bankers to economic slowdowns and recessions is to lower interest rates. Lower rates make borrowing more attractive for those businesses in need of capital, consumers in the market for a new car or home and students applying for education loans.
But lower interest rates punish those hoarding cash. The recent financial crisis sparked such demand for safe-haven U.S. Treasury securities that rates on three-month T-bills fell to 1/10 of 1%, and the yield curve (the spread between long-term and short-term yields) narrowed considerably, reflecting the desire for immediate safety over long-term returns. Conversely, aversion to risk has pushed yields on investment grade U.S. tax-exempt securities to levels above the yield offered on Treasuries. According to Vanguard, the yields of Vanguard Tax-exempt money market funds and similar state-specific funds have risen far above those of taxable funds, including Vanguard Prime, Federal and Treasury Money Market Funds. This reversal between taxable and tax-exempt yields offers opportunity for suitable investors.
Recessions are a normal part of the business cycle and offer opportunities to work off excesses while preparing for the next stage of economic growth. According to the National Bureau of Economic Research (NBER), the official arbiter of economic cycles, some U.S recessions were shallow (1/80-7/80), others have been more protracted (11/73-3/75). The average length of U.S. recessions occurring since 1945 is 10 months, while the average economic expansion lasts 57 months. Hang on and ride this out to recover lost ground and rebound.
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