By Brad Berger
By now, you have no doubt read the headlines: “The Recession is Over.” There is some truth to this statement, but it may be a bit too early to pop open that bottle of champagne.
A recession is a period in which our economy shrinks, meaning that we produce and consume less than we did in the prior period. Early estimates from the Federal Reserve and others indicate that our economy stopped shrinking sometime in mid August. We may even see modest growth in the third and fourth quarters of 2009, though if we do it will not be as impressive as you might think.
As The New York Times explains,
“American retailing is about to start looking up. But not because consumers are suddenly flush. Rather, the nation’s stores will soon be comparing their weak monthly sales figures with the even worse numbers they began posting last September, when Lehman Brothers collapsed and consumers subsequently snapped their wallets shut.”
From “Becoming Old Hat,” by Stephanie Rosenbloom, September 2, 2009
So, while the economy is “improving,” we should remember that it’s coming off of a very low starting point. On a cold winter day, it is an improvement for the temperature to rise from -5 degrees to 0 degrees, but that does not mean that spring has arrived!
The New York Times reminds us that, even after the recent thawing of the economy, retail sales are still billions of dollars below their highs of 2007. Specialty clothing stores are selling their wares at 2005 levels. Furniture sales are off even more, down 18.5% from their all-time highs.
Not wanting to sound overly negative, it is simply important to keep things in perspective. Yes, we have recovered from the abyss, but it does not mean that things will return to the way they were this year or possibly even the next.
As investors and as consumers, we must get used to the idea of “less.” With banks still reluctant to lend and with incomes stagnant or even falling, we may need to trade down to more modest housing in the months and years ahead. A conservative sedan might be more sensible than a larger, less fuel efficient SUV. In our investments, we must accept that the high returns of the 1990s and the mid 2000s are not likely to be repeated in the years ahead – this concept is referred to as “the regression to the mean.” As we plan for our retirements we must use realistic assumptions about the returns we can expect. And more than ever, it would be wise of us to keep a little more cash (or at a minimum, liquidity) on hand to tide us over in the event of a job loss or a major setback.
Despite the inflammatory rhetoric that dominates the political news these days, I do not believe that we are witnessing the “end of America.” But I do believe that there will be some choppy waters ahead and likely face a period in which expectations should be reexamined.
Cornerstone Financial Strategies is a University Place-based financial planning firm.