Recession Proofing
The signs are ominous. The Federal Reserve noted that “the tightening of credit conditions” could “restrain economic growth,” cut into consumer spending, and bring a lowering of payrolls.
If the economy turns sluggish, it will be rough on those who lose their jobs, while offering buying opportunities to those still employed. A recession may pummel the housing market, and you can put your savings toward a vacation home or perhaps trading up to a larger house.
Maybe a slowing economy will send the stock market down, and you can use your cash to buy shares at a bargain price. For the cash-rich, a recession can be a good time to buy a car as dealers slash prices to unload inventory. You also might seize the chance to remodel the kitchen or add a garage, knowing that contractors will likely bid more aggressively for your business.
Stockpile savings
With all this in mind, stockpile savings. Some money-market funds and one-year certificates of deposit are paying 5 percent. Pay down credit-card debt and set up a home-equity line of credit as an emergency backup should you lose your job.
Karen Hube in Best Life magazine suggests buying U.S. Treasury inflation-protected securities (TIPS), which offer a guaranteed return greater than the rate of inflation. She also likes the return from commercial real estate investment trusts.
Wall Street Journal columnist Jonathan Clements is also an advocate of stockpiling savings in case of layoffs. Forget funding your child’s college account and don’t make extra principal payments on your mortgage. His reasoning? If you get laid off, it might be difficult to get your hands on this money.
Got additional money to save? Put it in a savings account or a money-market fund held in a regular taxable account, Clements says. If you lose your job, this is the first place you should go for cash.
A positive outlook
Less gloomy about the outlook for this year is Allen Sinai, chief economist for Decision Economics, an economic advisory firm in New York City. He’s forecasting a 3 percent gain in the nation’s gross national product in the first half of this year, with health care and service sectors remaining strong.
“The continuing growth of these sectors should generate many new jobs and keep the economy from heading into a recession,” he said in an interview with the Bottom Line Personal publication.
He conceded that jobs will continue to disappear in manufacturing, construction, and mining, but the unemployment rate will increase by only a few tenths of a percentage point “not a cause for alarm.”
While Sinai predicts that U.S. stocks will rise despite the uncertainties of interest rates and the presidential election, “overseas equities should do even better because of faster economic growth and earnings increases.” Investors who can stand “moderate” risk should put 65 percent of assets in stocks, he said.
STEPS TO RECESSION PROOF YOURSELF
Worried about a recession?
* Stockpile cash in a money-market fund.
* Pay off credit-card balances.
* Set up a home-equity line of credit.
* Keep funding your 401(k) plan to get the full employer match.
