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What is a Recession?
Episode 68: April 29, 2008

Welcome to Money Girl, this is guest host Andrew Horowitz from The Disciplined Investor Podcast. And today on Money Girl, I will be talking about what that dreaded “R” word means to you.

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Recession, recession, recession. Everyone has been talking about this topic lately. Some say a recession is almost here, others say it has already begun. But, what is a recession exactly?

First, lets get to the definition of a recession and then I will give you some tips on how you could recession-proof your life.

Defining Recession

Well, technically, a recession is when the GDP or gross domestic product is showing two consecutive quarters of negative economic growth. While they are extremely unpleasant, recessions are a normal part of the business cycle and typically, well, last for six to eighteen months. What makes a recession noticeable to you and I is when it starts affecting our wallets.

So how can you spot a recession before it comes? Well, there are a number of ways. First of all, the obvious way is to watch the Gross Domestic Product or GDP. You can find the numbers anywhere online; a good website like Briefing, Dismal, Microsoft. If there’s a sudden drop in the domestic product and production, there’s a chance a recession might be coming. But you have to be careful in making those assumptions. Do your homework first. Maybe something fishy is going on with government policies on foreign trade, maybe a series of recalls, layoffs and outbreaks of illness have thrown things out of balance and they’ll quickly restore themselves the following quarter. There are thousands of factors that go into GDP that really sometimes can sometimes be difficult to determine whether they’ll be another quarter of negative growth or if it is an aberration. You can also watch the value of the US dollar. If the value drops while other currencies maintain their value or rise, it can sometimes mean an impending recession. Obviously when you see a drop in the dollar value, it is always in relation to other currencies. But, be aware of why the dollar is dropping and if it has to do with the other currency rising, or the dollar actually moving down. What we have seen lately is the dollar moving down, and that is obviously a precursor to the recession we are witnessing right now. Lastly, you can learn about the money supply and watch for decrease in that statistical measure. That is also a real good forward forecasting method to see if a recession is going to be around the corner.

Recession-Proof Your Life

Now, the really important part...how to recession proof your life. It’s all about planning ahead. Start paying off that bad debt. By ‘bad’ I mean those high interest credit cards and late fees. Combine all of your debt into a much better scenario for yourselves. Find the low interest rate possible, and you’ll have more success in balancing those books further down the line. Start a side business that can help keep you afloat should the economy take a turn for the worse and you’re laid off or have, you know, maybe your hours cut. Obviously it is all about planning ahead. Make sure you continually invest in your 401K plan as much as you can. Think about it, stocks are low and you get more for your money right now. Take that extra money you have and put it somewhere you know it’s going to grow no matter what happens to the economy. Make sure to refinance your mortgage and get a lower interest rate. This will help you save big time during a recession.

Benefiting from Recession

Which brings me to the upside of a recession. If you’re set up for it, if you are up for it, a recession is a time where you can make a lot of money. Interest rates always drop during a recession to entice people to borrow more money and make purchases, which will effectively stimulate the economy. So think about, if you have some money socked away, maybe it is a good time to start thinking about investing in some of the really beaten down real estate maybe the companies that have really been thrown to the side, maybe start looking at buying stocks that have been really beaten up.

Be smart, invest smart. Now is the time to invest in many of the things that were really high priced before. There are plenty of stocks, real estate investments and bonds and a whole host of companies that need money... and you can be the place to supply it. And you’re going to probably come out smelling like a rose once sometime in the future, once the recession passes.

Buying homes from people right before they’ll have to, well they have to foreclose will not only help them out and save their credit, but it will give you an unbelievable bargain. Sure, it may need some paint and carpet but that’s nothing considering you’ll be able to sell it for a cool hundred grand more when the market shifts in a year or two. It’s investments like these that will help you increase your personal wealth dramatically.

Cha-ching! That's all for now, courtesy of Andrew Horowitz, your guest host for Money Girl’s Quick and Dirty Tips for a Richer Life.

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With all the speculation about recession in the news lately, a lot of listeners have been asking about what is a recession and how does it effects them. So, thanks to Joshua and Duc for sending in questions and to thank them we are going to send them a copy of my book, The Disciplined Investor – Essential Strategies for Success.

As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.

Thanks for listening!

Comments (6) for What is a Recession? | Subscribe to Comment

Sam Says:
4/14/2009 8:00:56 PM

It is a definition of a recession, but surely it can last longer. In fact current recession is already exceeded eighteen months. It certainly makes sense to prepare for it as much as we can, however it is not always possible. Making money out of recession sounds great, but is not as easy as it sounds, it requires knowledge, ability and acceptance of a risk as these “bargain” stocks or shares, may actually turn into loss. Without a doubt for some entrepreneurs, recession presents an opportunity to make money. Sam from tenants forum

Beau Says:
2/23/2009 9:08:20 PM

Technically speaking Andrew is correct. A recession is defined as two consecutive quarters of negative growth. The role that the NBER plays in this is determining when the recession actually started. That is it. But the definition of a recession remains the same. Yes it can be difficult to determine if the economy is actually in a recession and how long it has actually been in a recession. That is why the BCDC has the singular authority of making the "official" determination. It is unfortunate that it takes so long for the determination of whether or not the economy is in a recession or not. The lag time between official declaration of a recession and when it actually starts, really affects peoples abilities to prepare for Surviving A Recession.

Dane D Says:
2/7/2009 12:47:50 AM

Higher income people are not just using quick payday loans, they are turning to rent-to-own stores for furniture. Places like Aaron's and Rent-a-Center have been seeing more people get their furniture over high end stores. Those places even offer quick payday loans, if you can believe it. The consensus is that more people are going to rent-to-own furniture outlets so they can get on a more reasonable payment plan than VISA or MasterCard will offer. Those places will let you get your pad spiffy faster than the quickest of quick payday loans will.

Austin D. Says:
1/20/2009 12:42:07 AM

Because of the result on the economic negatively result of the worse economic situation it seems that theirs not only one country who may be affected on it but also the countries that it situated, it may also be affected the domestics who worked out of the country. Paradoxical situations are everywhere around us, especially now as we witness probably one of the worst recessions since the depression. This happen when good situations end with bad results, like if you avoided getting payday loans but then found out you bounced a check, costing you more money than it would have if you had just opted for payday loans. This also applies to deflation. Deflation results in lower prices. Since the unemployment rate is still on the rise, more people are really going to need those lower prices to meet competitive prices. But there is good news, just like how payday loans are good news for people seeking to avoid late fees or overdraft charges. Most economists agree that we will probably not see deflation any time soon. The Feds say the economy will get worse before it gets better, so in the meantime, avoid future financial pileups with the help of payday loans for your financial emergencies.

Payday Loans Says:
12/4/2008 5:28:19 AM

Financial crisis in the United States of America is now in full swing. America’s economic troubles weren’t started by payday loans, to be sure. The official start time of the current recession was December 2007, according to the NBER. The NBER, or the National Bureau of Economic Research, has identified December 2007 as the peak time from where the US has declined ever since. The NBER defines recession as a period of time featuring “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.” The NBER is considered one of the best authorities on economic research, trusted by the government, the private sector, and academia, so this is about as official as you get. The biggest criteria are employment, income, industrial output, and sales figures. The peak time for income and employment were in December of 2007, industrial output peaked in January 2008, and then sales peaked in June. Congress, especially Democrats, weren’t exactly surprised, and called for a stimulus package. Senate Majority Leader Harry Reid (D-Nevada) said that “The announcement simply makes official what we have long known: with rising costs, rising unemployment, record foreclosures and depleted savings, we must do more to help families make ends meet.” Not rolling over and granting the banks’ wish to ban payday loans would be a good idea, too. Bear in mind that economies work in cycles, booms and busts. The expansion that just ended lasted from November 2001 to December 2007, for 73 months. The record is 120 months, but most expansions last an average of 57 months since the end of World War II. For more info on Payday Loans, click the link.

Chase591 Says:
4/29/2008 11:24:17 PM

Huh? A recession is two consecutive quarters of negative growth? That's a common description, a rule of thumb, but that's not technically correct, despite what Money Girl's guest host announces. Speaking of doing homework, he should have done some more of his own. The National Bureau of Economic Research's Business Cycle Dating Committee is considered by the US Gov't and all serious macroanalysts as the offical arbiter of when a recession begins and ends. They look at monthly data, not just quarterly GDP data, to determine the month the cycle changed. See www.nber.org/cycles/cyclesmain.html