Recessions represent the downward phase of the business cycle. They currently occur about every nine years. I realize that, to economists, this statement is blasphemy. They will tell you that nobody can predict when the next recession will occur. And to some extent, they have a point. No predictions are exact, and there is variability in every cycle. However, it is a useful rule to keep in mind, and one that I have personally followed.
The fact that recessions are difficult to predict shouldn’t keep us from trying to anticipate their arrival. If you know a recession is coming, you can prepare for the storm, much as people prepare for a hurricane in the Southeast or a tornado in the Midwest. You just have to know what to look for and have a plan or strategy prepared to move quickly if the economy goes south. In fact, predicting the economy is a bit like predicting the weather: In general, you can be correct about what will happen, but unexpected events can and do occur.
Given that the last recession ended in 2009, and the length of the business cycle is about nine years, that means the next recession should occur in 2018. If this is true, then we should all prepare and plan for the next recession. The question is, what can we do to prepare for the next downturn in the economy, and what does that mean for us as employees, consumers, and investors?
As an employee, you need to think about your position relative to other employees in your organization. Are you the most valuable employee at your company, and they can’t live without you? And how is your company doing relative to its competition? Even if you are the best employee at your company, there may be conditions you have no control over. Now may be the best time to put together that “emergency fund” of six months of expenses, like you have always heard you should do.
As a consumer, you may want to think about the opportunities involved. The best time to buy is when everyone else is selling or when nobody else is buying. Do you have a major purchase in mind that would be significantly affected by a recession? The best time to buy a new (or used) car is when the economy is in a recession and the auto companies need to sell out their inventory. They may also provide incentives that would not normally be offered. So, you may want to wait until the timing is right to make that next major purchase.
As an investor, you need to recognize that recessions are very bad for the stock market. Not only that, but the stock market typically “leads” a recession by as much as six months. Are you in liquid investments that you can sell out of at a moment’s notice? The good news here is that, once you see the stock market going south – like birds flying south for the winter, that is your indication to prepare for the “economic winter.”
Prepare now for the coming storm. If you have your personal finances in order, you will not only be able to ride out the storm, but you will also be ready to take advantage of opportunities as they present themselves. Take advantage of the business cycle, instead of being taken advantage of.