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How Ready Are You for the Next Recession?

by William Cowie

Fiscal cliff, sequestration, quantitative easing, government shutdown, debt ceiling… if you’ve been following the news with even half an ear, you couldn’t have escaped hearing the frothing frenzy over this seemingly endless parade of economic crises. Each one came to you as if the economy is standing on a ledge, about to jump. And yet, here we are, just a few months later and… well, nothing.

That’s right: pretty much nothing happened; the economy just kept on ticking along, unperturbed by the exaggerated reports of its untimely demise. That holds good news for you, and bad news. Which do you want first?

Let’s start with the good news: we’re not about to sink into the next recession this year or even next. The bad news? Don’t kid yourself, there is another recession in your future. How can I be so sure? Take a look for yourself — here’s a chart showing the American economy during the past 75 years: (Click to enlarge)

The dates in red show the bottom of each recession. Several things stand out from that chart:

  • We have recessions pretty often, and very regularly. You don’t need to be a rocket scientist to figure there will be another one before too long.
  • Look at the intervals between those dates: we have a recession every 7-10 years, almost like clockwork. regardless of who’s President or in Congress.
  • It’s been four years already since the last bottom. (The chart is up to date as of the end of September, 2013.)

Ad so, the bad news is you’re going to encounter another recession soon, but the good news is you have time to prepare. How do you prepare for a recession?

1. Get Out Of Debt

Nothing kills in a recession like debt. All debt. Even mortgage debt. Does this mean you need to pay off your mortgage? No, but it means you need to not add to your mortgage, and you need to assume your house is worth 20% less than today and make your mortgage decision based on that.

When things get tough, you can scale back almost every thing. But you can’t scale back debt payments. The lower they are, the better you are prepared for the inevitable next recession.

2. Look At Your Job

If you were thinking of changing jobs, do it sooner, rather than later. That way you build seniority before the next round of layoffs. When you consider future employers, consider how many layoffs they had in the last recession. Oh, and if you thought that a government job is safe, think again: the biggest drag on the unemployment rate has been shrinking local government. Don’t believe me? Look at this:

Government employment is shrinking

(Those spikes reflect temporary employees for each decade’s Census.)

3. Get Training

Training budgets may have been tight in recession years, but they’re loosening up all around the country. Get as much training as you can. Do as much networking as you can. These, believe it or not, are the good times… as good as they’re bound to get at least. Do whatever you need to do to add to the value you offer any employer. That’s probably the best preparation you can do in order to avoide layoffs, furloughs and all those other nasty things they do to employees in a recession.

4. Avoid the Bubbles

Before every recession, there’s a flurry of bubbles: things where prices escalate overnight and everyone jumps in because “they don’t want to miss this opportunity.” Miss the opportunity. Every single bubble in history ended in recession. Every one. And the people who suffer most are the people who played with fire by joining the speculative bubble when it was “hot.”

5. Save

Call me a maverick, but I actually look forward to the next recession. Why? Because that’s when you find most bargains. The trick to getting those bargains, though, is twofold:

  1. Having the fortitude to buy at a time when everyone around you is screaming “don’t buy now.”
  2. Having the cash with which to scoop up those bargains. Banks don’t have money to lend in a recession, so cash is the key.

If you think back to four years ago, everything was on sale, from Caribbean cruises to houses, furniture and cars. Why pay full price for something if you know you’re going to get it for half-price a short while from now?

If you want to upgrade your housing, the best time to do it is not when you think you can get the highest price for your house. It is when the gap between your current house and your next house is at its smallest. And that is in a recession, not now. Think of it this way: if you’re getting more for your house, the person selling to you is getting more for their house, too. The person overpaying for that house is… you. Far better to make the move up when it’s a buyer’s market, and that happens in a recession: if you’re bummed that you’re “not getting your price,” well, the person selling their bigger house to you is suffering even more.

Summary

You have 3-6 years to prepare for the next recession, and if you embrace this challenge, you have the opportunity to double or triple your net worth. In fact, you make bigger gains in your net worth in a recession than in the good times… if you play your cards right. And playing your cards right starts with the few items outlined above.

Is there anything else you think you should be doing to prepare for the next (inevitable) recession?

William Cowie offers a unique perspective on economic cycles on Drop Dead Money, and provides a quarterly update on the economy. The content is free, but you have to sign up to get it at http://dropdeadmoney.com/join/.

Posted in Money Management on 12.02.13 with 5 comments.

5 Responses to “How Ready Are You for the Next Recession?”

  • Great post! Love the charts.

    I’m currently working for a university, a well-established one with a ton of capital contributions and research income to long keep it afloat. However, I know others in my field who are leaving private colleges that do not have investor potential. Gotta go where the money is.

  • I work at a casino and it seems like we do better during a recession and tough times (sadly). But that doesn’t mean I should prepare for the good times when people don’t feel desperate need to gamble.

  • Little House says:

    I’m preparing for another recession by paying off my debt and investing and saving before the next recession begins (hopefully that will be more like 6 years – I need the extra time!)

  • jp says:

    Another way to upgrade your housing is by selling high & renting while the crisis hit.
    I don’t remember how many time I had to tell my family & friends that I won’t take a mortgage to buy a house when prices are “always climbing”

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