‘Economic winter’ should lead to subtle signs of spring

16 years ago
By Mike Del Tergo

    Realistically, the first half of 2009 will be tough for the U.S. economy. If this does not qualify as the “perfect storm” for the economy, we certainly do not want to see what would! Problems in the credit market caused large portions of the domestic economy to struggle throughout 2008. Exports were the only thing that kept the U.S. economy afloat. As financial titans such as Lehman Brothers collapsed, the global economy descended into recession, and the U.S. economy declined. This is the end of an economic era. While that has serious and sobering implications, this has occurred before, and we survived.     Many think recessions wind down excesses that build during economic expansions. Buyers run accumulated debt too high, inventories become too high until everyone is forced to adjust back to sustainable levels. As buyers cut back to work down debt, sales drop for businesses. Businesses then cut purchases to reduce inventories. As cutbacks cascade through the system, the economy goes into recession.
    Most of us are aware of the economic cycle of expansion and recession that historically occurred about every four years. We are less aware of the longer-term cycles that seem to occur – with a cycle length of roughly 35 years. When shorter-cycle contractions occur at the same time of longer-cycle contractions, the results tend to be much harsher. That seems to be what we are currently experiencing. Historically, both the 1930s and the 1970s seemed to involve coordinated short-term and long-term contractions. While each of those periods offered significant economic and social challenges, we survived. Typically, too, these difficult economic contractions probably paved the way for the next expansion.
    Given the coordinated short and long-cycle contractions we seem to be experiencing, expect the coming months to be as difficult as any we have experienced in many, many years. The unemployment rate will probably climb considerably higher. Bankruptcies will likely rise, and business firms we all know may fail. The outgoing administration and the Federal Reserve have taken strong action to bring the economy around, and the new administration will do even more. We need to keep in mind, however, that it takes time to turn an economy around. It often takes a year for stimulative actions to have an impact on the economy.
    The signs of improvement will be subtle at first, but they should begin to appear about the middle of this year. First, the rate at which business sales decline or housing prices fall will begin to fall more slowly. Credit will become more available, and consumers and businesses will begin to spend a little more freely as they regain confidence about the future. Just as spring follows winter, recovery follows economic contraction.
So how do we get through the harsh “winter?” It may be several years before we start into the best part of the next long-term expansion.
    One systematic way for people to get through this recession and be ready for when times improve, is to review current finances and develop a plan for the future.
    The following are some of the important issues to consider when approaching financial planning.
• What are your goals? What do you want to achieve? Define and set quantifiable financial goals. Your banker can help you set specific targets for what you want to achieve and when you want to achieve these results.
• Do you understand the effect of each financial decision? Each financial decision you make can affect several other areas of your life. All of your financial decisions are related. For example, an investment decision may have tax consequences that are harmful to your estate plans. A decision about your child’s education may affect when and how you meet your retirement goals.
• Do you periodically review your financial situation? Financial planning is an ongoing, dynamic process. Your goals may change over time due to changes in lifestyle or circumstances. Review and revise your financial plan periodically to make sure it reflects and stays on track with your long-term goals.
• Are you waiting to begin your financial planning “later?” Don’t delay. By developing good financial planning habits such as saving, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.
• Are you realistic in your expectations? Financial planning is a lifelong process and cannot change your situation overnight. Remember events beyond your control such as inflation, market volatility and interest rate fluctuations will affect your financial planning results.
• Take charge and stay involved. While you can’t control the economy, you can control how you respond to the current situation by understanding the present and preparing for the future.
    Mike Deltergo is senior vice president, senior portfolio manager at Key Private Bank, Maine. He is based in Portland and can be reached at 874-7188 or michele_deltergo@keybank.com.