Recession: glimmers of hope?

Recession: glimmers of hope?
The first glimmers of hope are starting to emerge across the world, reports Ambrose Evans-Pritchard.

Last Updated: 3:28PM GMT 05 Feb 2009

Glimmer of hope: the Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94pc in the worst fall in shipping history.
The pace of economic decline is slowing. Housing sales are picking up, even if prices are falling. Credit markets have begun to thaw.
This is the time-honoured pattern you expect to see when the downward spiral burns itself out and the cycle slowly starts to turn, helped this time by an unprecedented global monetary and fiscal blitz. But it may equally be a false dawn.
The Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94pc in the worst fall in shipping history. Copper prices are also edging up after plunging by two-thirds from their June peak. So are lumber prices.
The debt markets have opened like a flower in spring, at least in one sense. Companies issued $246bn (£171bn) in bonds in January, the most since the credit crisis began. France's EdF has raised €9bn (£8bn). Shell and RWE each raised €3bn this week. Blue-chip groups can borrow again.
"The mood is upbeat. There are swathes of cash pouring back into credit," said Suki Mann, a credit strategist at Société Générale. "The market closed down after the Lehmans collapse so there was a lot of pent-up demand, but they are having to pay materially higher spreads than pre-Lehmans."
So far this has not helped the rest of the corporate universe. Average yields on BBB-rated debt are a prohibitive 19.6pc. "The market is absolutely closed. There is no trickle-down yet," he said.
The interbank freeze has started to thaw, again in one sense. David Buik, from BGC Partners, said interest spreads on three-month dollar Libor have come down to 1pc from the extremes above 2pc at the height of the panic. "The cost of money is coming down, but the banks are still not lending to each other. It's virtually moribund," he said.
The US Federal Reserve's loan survey this week showed that lending is again picking up, albeit tentatively. The number of banks expecting to tighten credit has fallen from 80pc in the autumn to nearer 60pc, the lowest in a year.
Mortgage demand has stabilised, though that is small comfort in a country where 19m homes are standing empty and foreclosures are running at 6,000 a day. The number of evictions reached 2.2m last year. But at least the Fed is taking drastic action by purchasing mortgage securities (with printed money) in order to drive down the costs of home loans. The rate for 30-year mortgages has fallen to 5.28pc from 6.5pc two months ago.
The first fruit of these actions is ripening. Pending home sales rose by 6.3pc in December, led by the South and Midwest, a sign that the great glut of unsold houses may start to clear – albeit at very low prices, and very slowly. Some 45pc of the all homes sold in December were foreclosures or distressed sales.
US house prices have fallen 27pc from their peak, according to the respected Case-Shiller index, dropping every month since July 2006. They will fall further. The downward momentum is overwhelming, and the $200bn "option-arm" time-bomb is only just starting to detonate as these rates ratchet up. But it is telling that the shares of builders D.R. Horton, Toll Brothers, and Lennar have begun to rally. The ITB builders share index has risen 45pc from its nadir in December.
The bloodbath in manufacturing industry across the world since September has been frightening – Korea's GDP fell by an annualised 21pc rate in the fourth quarter – but the leading indicators in a clutch of countries look slightly less awful. China's PMI purchasing index rebounded for a second month in January, even if actual output has been declining for four months.
"There are tentative signs of stabilisation. China's manufacturing is no longer in free-fall," said BNP Paribas.
The indexes also bounced in the US, the eurozone, and Britain, despite cataclysmic car sales. The inventory cycle of the OECD club of rich states may be turning. Companies ran down their stocks during the credit crunch when capital costs soared. At some point this process must exhaust itself, forcing companies to start producing again. Michael Vaknin from Goldman Sachs said we are getting "closer to the point" in the re-stocking cycle where industrial output stabilises.
Veterans of Japan's Lost Decade know that these moments of optimism can be intoxicating – and costly. Japan had four bear market rallies before investors finally had the stuffing knocked out of them. Global debt deflation this time may prove just as powerful.
"Nothing moves down in straight lines," said SocGen's perma-bear Albert Edwards. "There will be little bounces. But our view is that investors can afford to be lazy and wait. There is not a cat's chance in hell that this really is the bottom of the cycle."

http://www.telegraph.co.uk/finance/4514330/Recession-glimmers-of-hope.html

The UK economy: an analysis and some predictions

The UK economy: an analysis and some predictions

The Daily Telegraphy's Economics Editor Edmund Conway offers an analysis of the current position of the UK's economy and some predictions for what lies ahead.

By Edmund Conway
Last Updated: 7:36PM GMT 23 Jan 2009
Comments 0 Comment on this article

There are two possible paths the UK economy could take in the coming years. Neither will be pretty; both involve a recession. But whereas one path sees the UK recover from the current slump within around a year, the other foretells a depression that lasts for many years, effectively lopping a major chunk of wealth off the size of the UK economy. No-one can predict with any degree of accuracy which one is more likely, but the dismal gross domestic product figures from the Office for National Statistics yesterday have, sadly, made the latter outcome that bit more likely.

What is relatively simple is to predict the next year for the economy.

As companies' profits continue to shrink, unemployment will climb higher still. The jobless total, which is just below the 2 million mark, will rise towards 3 million by the end of the year, and will probably edge higher still after that. This will ensure that while the recession seems at this moment to be a relatively abstract term for most Britons, by 2010 it will be a very real social issue.

House prices will continue to fall, with 2009 being similarly gloomy for the property market; as values drop many hundreds of thousands more homeowners will find themselves in negative equity, where the value of their home is worth less than their mortgage. This does not matter for those who retain their jobs, but the rise in redundancies means many simply won't have the luxury of remaining in their home until its price rises back above their mortgage.

The big question, however, concerns 2010.

By then, the Bank of England will most likely have cut interest rates to zero and will be actively pumping cash into the economy. By then, such a move will seem less controversial than it does now, since deflation will be the biggest threat - not inflation. But the threat is that the UK becomes trapped in a deflationary spiral, with prices falling faster and faster, and trapping more families in negative equity. Such spirals can be even more dangerous and intractable than bouts of hyperinflation. That, after all, was what happened in the 1930s; that is the depression trap that the UK faces.
The Bank of England believes that it has the power to prevent such an eventuality. The problem is that no central bank has ever successfully warded off a deflationary depression before. Ask Japan: it is still stuck on a depression that has lasted for longer than a decade.


http://www.telegraph.co.uk/finance/financetopics/recession/4326173/The-UK-economy-an-analysis-and-some-predictions.html

Recession And Depression: They Aren't So Bad

Recession And Depression: They Aren't So Bad
by Chris Seabury (Contact Author Biography)

More From Investopedia
Recession: What Does It Mean To Investors?
The Ups And Downs Of Investing In Cyclical Stocks
How Influential Economists Changed Our History
Recession-Proof Your Portfolio


Recessions and depressions have occurred many times throughout history. To many, they bring fear and uncertainty, but they are actually a natural part of the economic cycle. Unfortunately, there are a lot of myths surrounding market cycles, but in order understand them, we must look beyond these myths. In this article, we'll examine recession and depression, how they work and what they really mean for investors.

What Is a Recession?

First, let's take a look at recessions. There are two definitions of recession:

• one defines a recession as two consecutive quarters of negative economic growth, and
• the second (according to the National Bureau of Economic Research (NBER)) defines a recession as a significant decline in national economic activity that lasts more than just a few months.
  

How It Works

The growth of our economy rests upon the balance between the production and consumption of goods and services. As the economy grows, so do incomes and consumer spending, which continues the cycle of growth. However, because the world is not perfect, at some point, the economy has to slow. This slow down could be caused by something as simple as an oversupply, where producers manufacture too many goods. When this happens, the demand for those goods will drop. This causes earnings to slow, incomes to drop and the equity markets to fall. (To learn more, read Understanding Supply Side Economics.)

Historical Examples
Since the mid-1850s the U.S. had 32 recessions, and according to the NBER, most have varied in length, with the average recession lasting 10 months. The shortest recession on record lasted six months, from January 1980 to July 1980. Two of the longest recessions lasted for 16 months. These were the recessions of November 1973 to March 1975 and July 1981 to November 1982.

What Is a Depression?

A depression is a severe economic catastrophe in which real gross domestic product (GDP) falls by at least 10%. A depression is much more severe than a recession and the effects of a depression can last for years.

It is known to cause calamities in banking, trade and manufacturing, as well as falling prices, very tight credit, low investment, rising bankruptcies and high unemployment. As such, getting through a depression can be a challenge for consumers and businesses alike, given the overall economic backdrop. (To learn more, read The Importance Of Inflation and GDP.)

How It Works
Depressions occur when a number of factors come together at one time. These factors start off with overproduction and decreasing demand and are followed by fear that develops as businesses and investors panic. The combination of excess supply and fear causes business spending and investments to drop. As the economy starts to slow, unemployment rises and wages drop. These falling wages cause consumers to cut back spending even more, putting additional pressure on unemployment and wages. This begins a cycle in which the purchasing power of consumers is eroded severely making them unable to make their mortgage payments; this forces banks to tighten their lending standards, which eventually leads to bankruptcies.

Historical Examples
Throughout history, there are several examples of depressions. The most well-known is the Great Depression of the 1930s. However, this one title actually covers two depressions that took place during that time. The first depression occurred from August 1929 to March 1933, during which GDP growth declined by 33%. The second depression ran from May 1937 to June 1938, during which GDP growth declined by 18.2%. In addition, the Great Depression was preceded by another economic depression, which occurred from 1893 to 1898. (To learn more, read What Caused The Great Depression?)

What Can We Learn?

Recessions and depressions provide us with both negatives and positives that we can use to gain a greater understanding of how they work and how to survive them.

Negatives of Recessions and Depressions

There are many negative consequences of recessions and depressions. Let's take a look at a few:

1. Rising unemployment
Generally, rising unemployment is a classic sign of both recessions and depressions. As consumers cut their spending, businesses cut payrolls in order to cope with falling earnings. The difference between the two is that the unemployment rate in a recession is less severe than in a depression. As a basic rule, the unemployment rate for a recession is in the 5-11% range; by contrast, the unemployment during the first period of the Great Depression (1929-1933) went from 3% in 1929 to 25% by 1933.

2. Economic downturn
Recessions and depressions create a massive unwinding in the economy. During times of growth, businesses keep increasing supplies to meet consumer, demands, but at some point there will be too much supply in the economy. When this happens, the economy slows as demand drops. Recessions and depressions allow us to clear out the excesses of the economy, but the process can be painful and many suffer during this time.

3. Fear
Recessions and depressions create high amounts of fear. As the economy slows and unemployment rises, many consumers become fearful that things will not improve anytime soon. This fear causes them to cut back on spending, causing the economy to slow even more. (For related reading, see When Fear And Greed Take Over.)

4. Sinking values
Asset values sink in recessions and depressions because earnings slow along with the economy. This causes stock prices to fall because of the slowing earnings and negative outlooks from companies. In turn, these falling prices cause new investments for expansion to slow and can affect the asset values for many people.

Positives of Recessions and Depressions

There are many positives that take place as a result of recessions and depressions. They include:
1. Getting rid of excess
Economic decline allows the economy to clean out the excesses. During this process, inventories drop to more normal levels, allowing the economy to experience long-term growth as demand for products picks back up.

2. Balancing economic growth
Recessions and depressions help keep economic growth balanced. If the economy grew unchecked at an expansionist rate for many years, this could lead to uncontrolled inflation. By having recessions and depressions, consumers are forced to cut back in response to falling wages. These falling wages force prices to drop, creating a situation in which the economy can grow at normal levels without having prices run away.

3. Creating buying opportunities
Tough economic times can create massive buying opportunities in huge asset classes. As the economy runs its course, the markets will readjust to an expanding economy. This provides investors with an opportunity to make money as these low asset prices move back to normal.

4. Changing consumer attitudes
Economic hardship can create a change in the mindset of consumers. As consumers stop trying to live above their means, they are forced to live within the income they have. This generally causes the national savings rate to rise and allows investments in the economy to increase once again. (For related reading, see Stop Keeping Up With the Joneses - They're Broke.)

Conclusion

Clearly, both recessions and depressions have many effects on the overall economy. To survive and thrive in these environments requires that you understand what causes them and how those causes create positive and negative effects on the overall economy.

Some of the positive effects include taking the excesses out of the economy, balancing economic growth, creating buying opportunities in different asset classes and creating changes in consumer attitudes.

The negative effects include rising unemployment, a severe slowing in the economy, the creation of fear and the destruction of asset values.

It is by carefully understanding what recessions and depressions are that we can learn how to spot them - and protect investments from them.

by Chris Seabury, (Contact Author Biography)

http://www.investopedia.com/articles/economics/09/lessons-recessions-depressions.asp?partner=basics

Company profits slide as recession takes hold

Company profits slide as recession takes hold
Business profits are likely to dip by a third - more than in the early 1990s recession - experts warned after fresh figures underlined companies' declining fortunes.

By Edmund Conway, Economics EditorLast Updated: 6:39AM GMT 15 Jan 2009

The total amount of profits generated has fallen for a second successive quarter in the latest sign of the economy's deterioration.
Corporate profitability dropped in the third quarter of last year, despite a leap in takings from North Sea oil and gas groups as the crude price shot through record highs. Experts warned that the fall in profits only represented the beginning of a long series of declines during the current UK recession, which according to statistics released earlier this week is likely to be more severe than the slump of the early 1990s.
The net rate of return recorded by private non financial corporations dropped to 13.9pc in the third quarter of 2008, according to the Office for National Statistics. The rate is the lowest since early 2007, and is significantly down from the peak of 14.7pc recorded early last year before the full force of the economic crisis hit.
Roger Bootle, founder of Capital Economics and an economic adviser to Deloitte, said he expected profits ultimately to fall by around a third.
"The extreme cyclicality of profits means that in the early 1990s recession, profits fell, in real terms from peak to trough, by around 25pc. The more severe recession in the early 1980s is fast becoming the more relevant precedent. And back then, profits fell by about 37pc in real terms.
"I find it very hard to share in the general optimism that the recession will last for only a year. The economy will contract further in 2010 as well."

http://www.telegraph.co.uk/finance/economics/4240920/Company-profits-slide-as-recession-takes-hold.html

Recession-Proof Your Portfolio

Recession-Proof Your Portfolio
by Eric Petroff (Contact Author Biography)

While it would be utopian to have the economy grow at a stable rate, economic recessions are a fact of life and are as unavoidable as the setting of the sun. Like the sun, the economy goes through periods of rising (growth and expansion) and periods of setting (decline and recession).

In this article, we will look at how to properly invest as the economy moves through the setting phase - recession.

What is a Recession?

A recession can be defined as an extended period of significant decline in economic activity including negative gross domestic product (GDP) growth, faltering confidence on the part of consumers and businesses, weakening employment, falling real incomes, and weakening sales and production. This is not exactly the environment that would lead to higher stock prices or a sunny outlook on stocks.

Other aspects of recessionary environments as they relate to investments include a heightened risk aversion on the part of investors and a subsequent flight to safety. However, on the bright side, recessions do eventually lead to recoveries and follow a relatively predictable pattern of behavior along the way. (To read more about this, check out Recession: What Does It Mean To Investors?)

Keep an Eye on the Horizon

The real key to investing before, during and after a recession is to keep an eye on the big picture, as opposed to trying to time your way in and out of various market sectors, niches and individual stocks. Even though there is a lot of historical evidence of the cyclicality of certain investments throughout recessions, the fact of the matter is that this sort of investment acumen is beyond the scope of the ordinary investor. That said, there's no need to be discouraged because there are many ways an ordinary person can invest to protect and profit during these economic cycles. (To learn more about investing in cycles, read Understanding Cycles - The Key To Market Timing.)

To begin with, consider the macroeconomic issues of a recession and how they affect capital markets. When a recession hits, companies slow down business investment, consumers slow down their spending, and people's perceptions shift from being optimistic and expecting a continuation of recent good times to becoming pessimistic and uncertain about the future. As such, people get understandably frightened, become worried about prospective investment returns and rationally scale back risk in their portfolios. The results of these psychological factors manifest themselves in a few broad capital market trends.

Within equity markets, the results are pretty obvious. As people become uncertain about prospective earnings, they perceive a greater amount of risk in their investments, which broadly leads investors to require a higher potential rate of return for holding equities. Of course, for expected returns to go higher, current prices need to drop, which occurs as investors sell their higher risk investments and move into safer securities including government debt. This is why equity markets tend to fall, often precipitously, prior to recessions as investors shift their investments.

Recessions and Specific Investments

In fact, history shows us that equity markets have an uncanny ability to serve as a leading indicator for recessions. For example, the markets started a steep decline in mid-2000 before the economic recessionary period between March 2001 and November 2001. But even in a decline, there are pockets of relative outperformance to be found in equity markets.

Stocks

When investing in stocks during recessionary periods, the relatively safest places to invest are in high-quality companies with long business histories, as these should be companies that can handle prolonged periods of weakness in the market.

For example, companies with strong balance sheets, including those with little debt and strong cash flows, tend to do much better than companies with significant operating leverage (or debt) and poor cash flows. A company with a strong balance sheet/cash flow is better able to handle an economic downturn and should still be able to fund its operations as it moves through the weak economic times. In contrast, a company with a lot of debt may be damaged if it can't handle its debt payments and the costs associated with its continuing operations. (To learn how to read these documents, see What Is A Cash Flow Statement? and Breaking Down The Balance Sheet.)

Also, traditionally, one of the safe places in the equity market is consumer staples. These are typically the last products to be removed from a budget. In contrast, electronic retailers and other consumer discretionary companies can suffer as consumers hold off on these higher end purchases. (To learn more, read Cyclical Versus Non-Cyclical Stocks.)

Fixed Income

Fixed-income markets are no exception to this line of reasoning. Again, as investors become more concerned about risk, they tend to shy away from it. Practically speaking, this means investors steer clear of credit risk, meaning all corporate bonds (especially high-yield bond) and mortgage-backed securities because these investments have higher default rates than government securities.

Again, as the economy weakens, businesses have a more difficult time generating revenues and earnings, which can make debt repayment more difficult and could lead to bankruptcy as a worst case scenario.

Moreover, as investors sell these assets, they seek safety and move into U.S. Treasury bonds. In other words, the prices of risky bonds go down as people sell (or the yields increase) and the prices on Treasury bonds go up (or the yields decrease).

Commodities

Another area of investing you want to consider in the context of a recession is commodity markets. The general rule to understand about these investments is to keep in mind that growing economies need inputs, or natural resources. As economies grow, the need for natural resources grows, and the prices for those resources rise. Conversely, as economies slow, the demand slows and prices go down. So, if investors believe a recession is forthcoming, they will sell commodities, driving prices lower.

However, commodities are traded on a global basis, and U.S. economic activity is not the sole driver of demand for resources such as oil, gas, steel, etc. So don't necessarily expect a recession in the U.S. to have a direct impact on commodity prices, at least not as strong of an effect as we have seen in the past. At some point in time, the world's various economies will separate from the U.S., creating a demand for resources that is increasingly less sensitive to U.S. growth in GDP.

If you expect a recession, positioning your portfolio is quite simple. Shift assets away from equities, especially the riskiest equities like small stocks. You should also move away from credit risk in fixed-income markets and into Treasuries.

Investments and Recovery

So, what to do during a recovery? It sounds too simple, but investing for an economic recovery entails doing the exact opposite of what was described earlier.

Why?

Again, keep an eye ton the macroeconomic factors. For example, one of the most often used tools to reduce the impact of a recession is monetary policy that leads to a reduction in interest rates with the purpose of increasing the money supply, discouraging people from saving and encouraging spending. This helps to increase economic activity.

One of the side effects of low interest rates is they tend to creates demand for higher return, higher risk investments. So, as recessionary expectations bottom out, pessimism fades away and optimism works its way back into people's minds. Moreover, investors re-examine opportunities for riskier investments in the context of what is usually a low interest rate environment. They also embrace risk.

As a result, equity markets tend to do very well during economic recovery. Within equity markets, some of the best performing stocks are those that use operating leverage as part of their ongoing business activities, especially as these are often extremely undervalued after being beat up during the market downturn. Remember, leverage works great during good times, and these firms tend to grow earning faster than companies without leverage, but they also face real risks during weakening times. Moreover, growth stocks and small stocks tend to do well as investors embrace risk during an economic recovery. (To learn more about operating leverage, read Operating Leverage Captures Relationships.)

Similarly, within fixed-income markets, increased demand for risk manifests itself in a higher demand for credit risk, meaning the corporate debt of all grades and mortgage-backed debt tends to attract investors, driving prices up and yields down. Logically, U.S. Treasuries tend to go down in value as investors shift out of these assets and yields go back up.

The same logic holds for commodity markets in that faster economic growth means higher demand for materials, driving prices up. However, remember that commodities are traded on a global basis, and U.S. economic activity is not the sole driver of demand for resources.

Will the Sun Come Out Tomorrow?

To conclude, the best advice to investing during recessionary environments is to focus on the horizon and manage your exposures. It is important to minimize the risk in your portfolio and maintain your capital to invest in the recovery. Of course, you're never going to time the beginning or end of a recession to the day or the quarter, but seeing a recession far enough in advance isn't as hard as you might think. The real trick here is to simply have the discipline to step away from the crowd and shift away from risky, high-returning investments during times of extreme optimism, wait out the oncoming storm, and have an equal discipline to embrace risk at a time when people are shying away from it to get ahead of the cycle.

To keep reading about market recessions, check out Panic Selling - Capitulation Or Crash? and The Greatest Market Crashes.

by Eric Petroff, (Contact Author Biography)Eric Petroff is the director of research of Wurts & Associates, an institutional consulting firm advising nearly $40 billion in client assets. Before joining Wurts & Associates, Petroff spent eight years at Hammond Associates in St. Louis, another institutional consulting firm, where he was a senior consultant and shareholder. Prior to Hammond Associates, he spent five years in the brokerage industry advising retail clientele and even served as an equity and options trader for three of those years. He speaks often at conferences and has published dozens of articles for Investopedia.com and the New Zealand Investor Magazine.

http://www.investopedia.com/articles/08/recession.asp

What causes a recession?

Investment Question
What causes a recession?
According to the National Bureau of Economic Research (NBER), recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in

• real gross domestic product (GDP),
• real income,
• employment,
• industrial production and
• wholesale-retail sales".

More specifically, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.

Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as

• increased production costs,
• higher energy costs and
• national debt.

(For more on this topic, see All About Inflation.)

In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession.

For further reading, see
Recession-Proof Your Portfolio and
Recession: What Does It Mean To Investors.

This question was answered by Chizoba Morah.

http://www.investopedia.com/ask/answers/08/cause-of-recession.asp?ad=feat_fincrisis

Krugman on Life Without Bubbles

Krugman on Life Without Bubbles

By Susie Madrak Monday Dec 22, 2008 11:30am

Saying he's "fairly optimistic about 2010," Paul Krugman says the economy will still need economic stimulus for several years to come and warns Obama to resist the temptation to cut back at the first signs of recovery:
A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.
But it will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble. For one thing, export growth, after several good years, has stalled, partly because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies — making U.S. production much less cost-competitive.
Furthermore, even if the dollar falls again, where will the capacity for a surge in exports and import-competing production come from? Despite rising trade in services, most world trade is still in goods, especially manufactured goods — and the U.S. manufacturing sector, after years of neglect in favor of real estate and the financial industry, has a lot of catching up to do.
Anyway, the rest of the world may not be ready to handle a drastically smaller U.S. trade deficit. As my colleague Tom Friedman recently pointed out, much of China’s economy in particular is built around exporting to America, and will have a hard time switching to other occupations.
In short, getting to the point where our economy can thrive without fiscal support may be a difficult, drawn-out process. And as I said, I hope the Obama team understands that.
Right now, with the economy in free fall and everyone terrified of Great Depression 2.0, opponents of a strong federal response are having a hard time finding support.
John Boehner, the House Republican leader, has been reduced to using his Web site to seek “credentialed American economists” willing to add their names to a list of “stimulus spending skeptics.”
But once the economy has perked up a bit, there will be a lot of pressure on the new administration to pull back, to throw away the economy’s crutches. And if the administration gives in to that pressure too soon, the result could be a repeat of the mistake F.D.R. made in 1937 — the year he slashed spending, raised taxes and helped plunge the United States into a serious recession.
The point is that it may take a lot longer than many people think before the U.S. economy is ready to live without bubbles. And until then, the economy is going to need a lot of government help.

Tags: Recession, stimulus, Wall Street Collapse

http://crooksandliars.com/susie-madrak/krugman-life-without-bubbles

Whose recession is this, anyway?

Whose recession is this, anyway?
For some people, bargain prices and new workplace advantages make the economic downturn a time to profit.
By Catherine Holahan, MSN Money

Stephen Lasher reads all the dire economic forecasts declaring this recession the most worrisome since the Great Depression. But life doesn't seem so bad to Lasher. In fact, his horizons have never looked brighter.

Last year, the 33-year-old Columbia Business School grad landed a great job at media company NBC Universal. Now his spending money stretches further than before, thanks to retail store sales. Last month, he closed on his first home: a one-bedroom waterfront condo in a complex with a gym, pool and doorman.

"I am feeling good," Lasher says. "The housing prices were out of control before. . . . Now I was not only able to get a good price, but I was also able to get a mortgage interest rate well below what I thought would have been possible."

Lasher's neighbor James Tortorella agrees that the recession has afforded him some opportunities. He bought his condo in November. "I found a great deal," says Tortorella.

Scoring a bargain condo

So the economic crisis isn't hurting all Americans.

True, the combination of plummeting home prices, steep stock declines and rising unemployment has proved disastrous for many, particularly those new to the job market or nearing retirement. Nationwide, unemployment reached 6.7% in November, according to a Dec. 5 report from the U.S. Bureau of Labor Statistics. The rate jumps to more than 11% when the bureau adds workers who have ceased looking for employment and former full-time employees forced to reduce their hours.

No jobs for grads?

But the same weakness in the economy has helped others, providing many young and midcareer professionals with new purchasing power and giving some a boost up the corporate ladder.
"Middle-career people have the opportunity to do things they were never given exposure to before," says Kathleen Downs, a recruiting manager at Robert Half International, one of the world's largest business staffing and consulting firms. As companies trim their staffs, she explains, midcareer people get an earlier shot at jobs once held by more-expensive, more-experienced workers.

"It's a good time to be positioning themselves," she says of the younger workers.
For people with relatively secure jobs and cash in the bank, it's also a good time to shop. The Consumer Price Index, a measure of the average price of common household goods purchased by urban consumers, fell 4.4% in the past three months, according to the Bureau of Labor Statistics. In that period, transportation costs fell more than 26% because of steep fuel price declines. Apparel dropped prices 2.4%. Year over year, the S&P/Case-Schiller home price index is down 16.6%, according to data released Nov. 25.

Lasher -- and doubtless many like him -- see the price declines as a welcome dose of reality, placing homeownership, vehicle purchases and even blue-chip company stock within reach of a new generation.

"I personally was waiting for a market correction," he says.

Price drop puts homes within reach

Welcome, indeed. A year ago, Lasher was ready to give up on the idea of owning a home near his New York City job. The going rate for one-bedroom condominiums near the city was simply too high.

"I thought I was going to have to move farther away from New York City," Lasher says.
But as the housing market got worse, things got better for Lasher. In recent months, condominiums on the New Jersey side of the river, once prohibitively expensive, began to look affordable. Lasher watched as prices fell about 25% from their peak.

He had been renting an apartment near the New Jersey commuter ferry on the Hudson River, but in November, he pounced on a one-bedroom condo at The Hudson Club, a waterfront complex overlooking Manhattan and just a short walk to the ferry. He locked in a fixed-rate mortgage at 5.875% interest. Lasher isn't discussing precisely what he paid, but here's an idea: a two-bedroom condo in the same complex is now listed for sale at $569,000.

"I don't expect 20, 30 or 40% increases," Lasher says of the condo's value. But he is confident that the purchase price makes his unit a good investment for the future.

Lasher knows he and his peers are not immune to the effects of recession. Some business school buddies who went into the banking business have been laid off.

The national statistics confirm that midcareer professionals have not escaped the downturn unscathed. Unemployment for people ages 25 to 34 rose to a 10-year high of 6.9% in November. That's up from 4.7% a year earlier. Employees ages 35 to 44 also saw record, albeit lower, unemployment rates: 5.4% in November, compared with a 3.5.% rate 12 months earlier. Those figures don't include the more than 33,000 additional job cuts announced this December.

As companies lay off more-senior employees, many midcareer workers are forced to assume additional management responsibilities without receiving pay increases.

"What we are not seeing is the pay increases that would often come in a very strong economy," says Robert Half's Downs.

It may be quite a while before those pay increases return. Consumer spending rose just 2.6% in 2007 from the previous year, according to Bureau of Labor Statistics figures released Nov. 25. Though spending kept pace with inflation, growth was significantly weaker than the 4.3% seen a year earlier. And consumer confidence is still near record lows, though it has risen slightly from its worst levels, according to The Conference Board. A majority of consumers still rate business conditions as "bad" and jobs as "hard to get."

Hard to gain entry at this level

That's how Andy Fisher sees the situation. Fisher is a New York University senior majoring in journalism and history. He thinks his future employment prospects are far less certain thanks to the downturn. Entry-level journalism and publishing jobs seem scarce, he says.

"I am currently in an internship, and, if anything, they are firing, not hiring," Fisher says. "The chances of getting a job at the publishing houses I had hoped to work for seem pretty slim."
In terms of unemployment rates, the recession is hitting recent and soon-to-be college grads hardest. Nearly 11% of 20- to 24-year-olds were unemployed in November, according to the statistics bureau. That's up from 8% a year ago. The increase is due to hiring freezes at major companies and slowdowns at large employers such as Google. It doesn't help to have a glut of older, more-experienced workers in the marketplace willing to downsize careers in return for a steady income.

"It is pretty safe to say that all levels of hiring have slowed," says Michael Erwin, a senior career adviser for online job site CareerBuilder.com.

The recent grads who do land jobs find the process is taking longer. On average, recent college grads are searching an additional six weeks before securing a job, compared with last year, according to a recent CareerBuilder study. Erwin recommends that students set to graduate in the spring begin looking for jobs now. He suggests graduates be prepared to accept positions in fields other than their preferred field, for less pay than they may have targeted previously.
Fisher is weighing whether he should switch to a different career.

"It's pretty troubling," he says. "I basically just have to hope that somebody will pay me for something and keep myself marketable to as many different fields as possible."

'Experienced' translates as 'expensive'

One bright side for younger workers who obtain jobs is they are less likely targets for layoffs. The same can't be said of older workers. In this recession, businesses facing cuts are more likely to buy out or fire expensive, experienced workers whose total compensation, including salaries and health care costs, is more material for the bottom line.

"One way that people try to trim down their work force is by buyouts -- it is usually a first resort for companies trying to shed workers," says Andrew Eschtruth, the communications director at Boston College's Center for Retirement Research.

Buyout offers can present tough decisions for older workers whose retirement savings have been depleted. Many older workers now think they have no choice but to remain on the job and try to rebuild their resources, says Steve Sass, the associate director at the Center for Retirement Research and a co-author of "Working Longer: A Solution to the Retirement Income Challenge."
Sass suggests that even conservative investors -- those who had only 30% of their nest egg in the stock market -- are now contemplating losses of 10% to 15%.

"If you had to save to cover that loss, it is enormous, and it is pretty onerous," Sass says. "If you had to work to overcome that, you're talking another year and a half to two years."

The unemployment rate for workers ages 55 to 64 rose to 4.6% in November. That may sound OK compared with the rates affecting younger workers, but it's a 70% increase for that group from a year ago.

"Previous recessions tended to hit younger workers hard and not so much for older workers," says Richard Johnson, a principal research associate for retirement issues at the Urban Institute, a nonprofit think tank in Washington, D.C. "But what we're seeing this fall is a rather steep increase in the unemployment rate for those 55 and older and those 65 and older."
Employment professionals are all about opportunity, so they try to put a positive spin on all this. They suggest that, for now, employers are in the driver's seat, able to lay off workers and keep salaries down. But their leverage will vanish when the economy turns around, and the leverage will pass to employees who have added responsibility during the downtown with no significant increase in salary. When that happens, it's time to ask for a fat raise, they say.

"There is some light at the end of the tunnel," CareerBuilder's Erwin says.

Produced by Darragh Worland
Published Dec. 5, 2008

http://articles.moneycentral.msn.com/Investing/StockInvestingTrading/Whose-recession-is-this-anyway-msnmoney.aspx?page=all

25-11-2008: Deeper downturn in the offing, says Moody Economy.Com

25-11-2008: Deeper downturn in the offing, says Moody Economy.Com
Email us your feedback at fd@bizedge.com

SYDNEY: Although policymakers around Asia insist the region is well-placed to withstand global financial instability, risks of a deeper downturn are rising, said Moody Economy.Com associate economist Alaistair Chan.

He said a number of third quarter (3Q) gross domestic product (GDP) releases highlighted the already-deteriorating situation and Asian countries might face a future of lower potential growth.

“Conditions across Asia continue to worsen. Japan and Singapore are ‘officially’ in recession, and growth in most other countries is slowing. Exports are slowing sharply, and investment is also weak.

“There is a growing realisation that problems in the US are more protracted than first thought and that conditions will not return to the way they were a few years ago any time soon, if ever,” he said in a report yesterday.

Chan said there was a case to be made that a global downturn would hurt Asia more than it would the United States.

“The reason is that Asian countries run current account surpluses, while the US runs a current account deficit. This seems counterintuitive. But it matters because it means Asian countries are mostly net producers, while the US is a net consumer.

“A reduction in global demand means a reduction in global supply, so although the US downturn will trigger this reduced global demand, Asia could bear the brunt of the problem through reduced global supply,” he said.

Chan said much research had been done on the Great Depression and one overlooked reason for why the United States was so affected during the Great Depression was that in the 1930s, the US was the world’s largest exporter and ran the world’s largest current account surplus, while Europe had the place of the US today, running a trade deficit and consuming American goods.

“So when demand collapsed, there was overcapacity, mostly in the United States. Rather than boost domestic demand to absorb the excess production, the government imposed import tariffs, notably the Smoot-Hawley Act. This led other countries to retaliate, further blocking off markets for American goods.

“This resulted in a painful adjustment period, when production had to fall to the level of consumption, which was ultimately corrected with the onset of government spending for World War II,” he said.

Chan said the US now was undergoing another period of adjustment in which consumption and investment relative to GDP fall while saving increased.

Among other things, he said this implied a reduction in the US current account deficit and hence a reduction in Asian current account and trade surpluses. “Given that China is its second biggest import supplier and the country with which it has the largest bilateral trade deficit, it is likely to bear a large part of the adjustment.”

Many commentators claim to know the solution for Asia — stimulate domestic demand. But if the process were straightforward, governments would likely have done so already. The flip side is that they have no other choice. With little demand in Western markets, either domestic demand must compensate, or supply must shrink.

Chan said If the adjustment in consumption and saving in the US was part of a long-term correction, there would be major implications for Asia.

“For one thing, entire export industries will have to be retooled to serve domestic sectors.
“Retooling, say, factories in Shenzhen from assembling iPods and mobile phones toward products that Chinese consumers would buy would require a long process of reconfiguring supply chains across Asia, affecting, among other things, semiconductor production in Taiwan, memory production in Korea and hard drive production in Singapore.”

Chan said the process was likely to take decades. and in terms of government policy, to boost domestic consumption, saving would have to be discouraged.

Recession Survival Guide

Your 2009 Recession Survival Guide
by Kimberly Palmer, James Pethokoukis, and Luke Mullins



Tuesday, December 2, 2008


So you think it's bad news that a recession has been "officially declared"? (Turns out, it started back in December of last year.) Puh-lease. First of all, it shouldn't be news to anyone that the economy has been in the tank for a while. Unemployment has been climbing (from 4.4 percent in March 2007 to 6.5 percent now), and the stock market has been plummeting (down roughly 40 percent so far this year). Ouch!


Second, the recession announcement by the National Bureau of Economic Research can be a handy catalyst for action. Now that there's not a shadow of a doubt that the economy is terrible, you can look ahead to 2009, make smart plans to weather the downturn, and--if you're savvy--figure out how to take advantage of the tough times we'll be facing all next year:


The Economic Outlook


Oh, it's going to be nasty out there. Not so nasty that your great-grandparents will quit telling those Great Depression stories, but bad nonetheless. For a while, economists thought we might luck out and get away with a downturn no worse than the 1990-91 recession. That one lasted eight months, with back-to-back quarters of negative GDP growth of 2.9 percent and 2 percent. Unemployment rose from 5.2 percent to 7.8 percent. But now it looks as if the 1981-82 downturn is the better comparison. It lasted 16 months, had several quarters where the economy shrank 3 percent more, and saw unemployment rise as high as 10.8 percent. So what about the recession of 2008-2009?


Weakening big picture.



There have been two quarters so far during the recession where the economy has gotten smaller, each time by less than 1 percent. Those days are over. "We are currently forecasting a 4 percent decline in real GDP in the fourth quarter, placing it among the worst quarters for economic growth in the postwar period," says Jason Trennert of Strategas Research. The first three months of next year could be just as bad. And even once the economy begins to grow again, the overhang from the credit crisis will probably crimp significant growth until until 2010.


Worsening unemployment.



It's the sharp jump in job losses that really pushed the NBER to make its recession call. And things only seem to be getting worse. "Current conditions in the economy are terrible," notes IHS Global Insight economist Brian Bethune. "Employment continues to go south, the unemployment rate is ramping up sharply, and households are seeing their net financial worth evaporate before their eyes on a daily basis." Economists say that an 8 percent unemployment rate is likely--and 10 percent is not out of the question. Even worse, more people without jobs will make it that much tougher for the housing market to rebound anytime soon.


Sickly stock market.



The stock market often begins to perk up about three to six months before the end of a recession. But economist Michael Darda of MKM Advisers says the time to buy has yet to arrive. "We don't expect the current recession to end until late 2009, which means equities may not put in a durable bottom until the first half of 2009."


Tight credit.



Since the housing bubble started to unravel, credit card companies have been cutting credit limits and, in some cases, raising interest rates, partly because they fear more consumers will default as financial stress spreads. "We haven't hit bottom yet in terms of credit card companies trying to protect themselves," says Justin McHenry, president of IndexCreditCards.com. Even if the Federal Reserve continues to hold down interest rates, McHenry says credit card companies will probably raise rates and cut credit limits through early 2009. That means people who have credit cards with decent rates should hold onto them, because they might not find a better deal elsewhere.


Food prices may drop.



After spikes in the prices of milk, eggs, and other staples earlier this year, shoppers may be in for some relief in 2009. The price increases were partly caused by the high price of gasoline, which is used to transport much of our food. Now gas prices are dropping, leading some analysts to expect lower supermarket prices. But it won't happen overnight, because the cost of diesel is still high, and farmers need to recover from the high input costs they faced over the summer.


How to Weather the Storm


Even though you can't control the economy, you don't have to just sit there and be buffeted by these big economic forces. You can do stuff!


Live below your means.



Some people are shopping for this year's holiday gifts while still paying off their 2007 purchases, says Gail Cunningham of the National Foundation for Credit Counseling. Now's the time to re-evaluate those habits, she says, before piling on even more debt. You can make sure you pay as little as possible for gifts by using online comparison websites. Another option is taking advantage of layaway programs at retailers that let you pay off purchases before you bring them home. That way, you avoid paying high interest rates to credit card companies.


Bolster that emergency cushion.



Even in flush times, financial advisers say consumers should have about six months' worth of expenses in their bank account to guard against job loss or other emergencies. Now, with the unemployment rate headed toward 7 percent, it's more important than ever.


Toughen up your portfolio.



It doesn't matter how smart your investing strategy is if you won't stick with it. And the roller-coaster stock market is sure making that tough to do. Jittery investors might want to think about stashing somewhere between 30 and 40 percent of their portfolio in less risky investments, such as bond funds, treasury bills, or money market funds. But don't overdo it. Investors who are decades away from retirement should keep the bulk of their portfolios in stocks. If you want to dial down your risk, look to stock funds that have been bucking the bear, such as Apex Mid Cap Growth and Reynolds Blue Chip Growth. Also, exchange-traded funds, which look like mutual funds but trade like stocks, give you more diversified exposure to a particular sector or industry than betting on individual issues.


Save for a down payment.



Unlike in the housing-boom days, borrowers will have to be able to make a sizable down payment to qualify for the lowest mortgage interest rates. So if you're looking to go bargain hunting in real estate, begin setting aside a little bit of cash each paycheck to put toward a down payment. When you begin to feel better about your job security, you'll be ready to take the plunge.


How to Take Advantage of the Bad Times


Time to stop surviving and shift to thriving. It's an ill wind that doesn't blow some good, and you need to make the most of the opportunities that are out there.


Energize your career.



Don't just worry about keeping your job--make it better. Lean times present an opportunity for niche employees to put other skills to work and rebuild their reputations as go-to multitaskers. Employees should actively try to pick up the work of their departed peers. Also, volunteering to take on new responsibilities can pave the way for a negotiation in six to eight months, when an employee can prove that the job has evolved and is now worth more on the market. A new outlook and approach like this will help you hold on to your current job, or pave the way to your new career.


Refinance your home.



Recent Federal Reserve announcements intended to ease the financial crisis have sharply reduced 30-year fixed mortgage rates, to 5.5 percent at the start of the week vs. 6.2 percent just two weeks earlier, according to HSH Associates. "Recession equals lower Treasury rates, which equals lower mortgage rates, which equals a great opportunity to refinance," says Mike Larson, a real estate analyst at Weiss Research.


Buy a home.



Home prices nationally have already fallen more than 20 percent from their 2006 peak, and in certain boom-and-bust states the declines have been even more precipitous. So if you've got a stable job, good credit, a down payment, and a strong stomach, there are certainly buying opportunities out there for you. "I can point to properties here in [Florida] that are off 40 to 50 percent from their peak bubble levels," says Larson, who is based in Florida. "This is creating an opportunity."


More from Yahoo! Finance: • The $64,000 Question: Who Wants to Be a Millionaire?• The Bright Side: Deep Retailer Discounts• 4 Ways to Get the Most Out of Holiday Sales
Visit the Banking & Budgeting Center


Look for the next great stock investments.



Not only can you pretty much count on next year being one of lousy economic growth, you can for sure count on Barack Obama being president. And there are a few stocks out there that could get a boost from an Obama administration, including Chesapeake Energy (natural gas) and AeroVironment (aerial vehicles for Afghanistan). Also, keep an eye out for "growthy" (high earnings growth) small stocks, especially techs, which often are the first ones to rise when a new economic expansion nears. Hey, the recession can't last forever, right?


Forget about keeping up with the Joneses.



Since almost everyone's budgets are strained right now, cutting back is en vogue. Pollster John Zogby has found that a growing segment of the population has become more focused on spiritual fulfillment than on material success. Similarly, futurist Faith Popcorn's research shows that the concept of "frugality" has taken hold among families, with parents increasingly teaching their children to reconsider how much they consume and whether they could do with less. The "new frugality" movement, as she calls it, will usher in a new set of values for the next generation, she says.


Negotiate almost everything.



From credit cards to clothes, companies are open to making deals as they struggle to keep customers. "If you're a good customer, [credit card companies] may be more apt to negotiate your rate because they don't want to lose you," says McHenry of IndexCreditCards.com. At farmers markets and clothing boutiques, simply asking, "Can I get a discount?" can lead to a lower price. Paying with cash increases the chances of making a deal because it allows retailers to avoid credit card transaction fees.


Copyrighted, U.S.News & World Report, L.P. All rights reserved.



http://finance.yahoo.com/banking-budgeting/article/106242/Your-2009-Recession-Survival-Guide

What is Recession? What is Depression?

Tuesday, 11 Nov 2008
Recession or Depression? Finding the Trigger ...
Posted By:Daryl Guppy

The key question facing markets these days is the difference between recession and depression. A recession is an economic slowdown that may last for 6 to 18 months. A depression is an economic pullback that may last from two to four years. We'd rather not have a recession at all but if we have to choose one or the other, I'd rather be recessed than depressed!

In either case, the market moves in anticipation of the event. The market decline develops before the fundamental signs of a recession or depression become evident. The market leads the confirmation of conditions.

The market also leads a recovery. In a recession, the market will develop strong trending behavior many months prior to the official confirmation of the end of a recession. This recovery provides trend trading opportunities.

In a depression the market will develop a long-term consolidation pattern. This is an investment period that lays the foundations for generational fortunes. Trend-trading opportunities do not develop for several years. This consolidation and accumulation phase concentrates on creating income flow from dividends. The fundamental end of a depression is not recognized until many months after the market has already reacted.

Right now, market is hovering near significant support levels. The closest of these we call recession support targets. The lowest of these we call depression targets. Many analysts have compared the current market situation to the market collapse in 1929. This week we look at charts from the 1929 period. In particular we look at the similarity of behavior.

The above chart is the weekly Dow for 1929 to 1930. The significant features are these:
The rapid fall is followed by a rebound and rebound failure.
The primary rebound failure occurs rapidly with another market collapse.
The pile driver low is retested within 12 months
Support, defined by the pile driver low, is not successful.

The pink circle shows the comparable position of today’s market. This is a period of high volatility, but volatility lessens and the market moves into a more clearly defined trending behavior. This pattern of behavior suggests that a rebound from the current support levels may persist for around 20 weeks.

The important feature is the rapid failure of the trend line followed by a rapid failure of the pile driver low support-level. The failure of pile driver support brings the really bad news. This failure is acute because the pile driver low support does not equal any previous historical support level.

The low of the market develops in 1932, about three years after the 1929 crash. The key trigger is the failure of support set by the pile driver low. The disaster is that it takes 25 years for the market to exceed the high of 380 set in July 1929. This is why the Depression is referred to as a generational event. The current situation has the potential to have the same generational impact.

SEE CHART ABOVE

The key trigger that separates a recession from a depression is the behavior of the rebound from the pile driver low. After the 1987 crash the rebound quickly developed strong trending behavior. The move above the midway point in the market fall signaled a continuation of the uptrend. This is recession behavior. Depression behavior is when the market fails to move above the midpoint of the extreme fall area.

On the current Dow chart, the area near 12,000 is the key level to watch. Failure to move above this level suggests a depression scenario may develop.

A sustained move above 12,000 signals a recession. There is one caution in this analysis. The Dow has not yet developed a confirmed pile driver bottom pattern on the weekly chart. The low of this pattern will determine the mid-point resistance level that is used to signal a recession recovery.

Markets will not behave the same way as in 1930, but they will develop in a similar fashion. There is a high probability that these behaviors will develop in shorter time frames.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.
© 2008 CNBC, Inc. All Rights Reserved

http://www.cnbc.com/id/27653888

Industries That Thrive On Recession

Industries That Thrive On Recession
by Andrew Beattie (Contact Author Biography)

Recessions are hard on everyone - aren't they? Actually, just as wars have their war babies (companies that perform well during war and suffer during peace), recessions have their tough offspring as well. In this article we'll take a look at the industries that flourish in the adversity of a recession and why they do so well when everyone else is struggling to make ends meet. (For related reading, see Recession: What Does It Mean To Investors? and War's Influence On Wall Street.)

Discount Retailers

It makes sense that, as budgets feel the strain of an economic downturn, people turn to the stores that offer the most for the least. Discount retailers like Wal-Mart may appear to do well at any time, but this is not entirely true. They often suffer in good times as people flush with money buy higher-quality goods at competing outlets. To remain competitive, they are forced to upgrade their product lines and change the focus of their business from thrift to quality. Their profits suffer from either lost sales or less margin on the goods they sell. In hard times, however, these retailers excel by going back to core products and using vast economies of scale to give cheap goods to consumers. Designers and producers of lower-end products also see an upswing as more people jump from brand names to make their paychecks go further. People may not like discount retailers, but in a recession most people end up shopping there. (Learn one way these companies make their money in What Are Economies Of Scale?)

Sin Industries

In bad times, the bad do well. Although it seems a little counterintuitive, people patronize the sin industry more during a recession. In good times, these same people might have bought new shoes, a new stereo or other, bigger-ticket items. In bad times, however, the desire for comforts doesn't leave, it simply scales down. People will pass on the stereo, but a nightly glass of wine, a pack of cigarettes or a chocolate bar are small expenditures that help hold back the general malaise that comes with being tight on cash. Be warned, though - not all sin businesses prosper in a recession. Gambling, with the exception of the truly troubled gamblers, becomes an extravagance and generally declines during recessions. In fact, casinos do their best trade when the economy is roaring and everyone feels lucky. The most prosperous businesses in this industry are the purveyors of small pleasures that can be bought at a gas station or convenience store. (To find out if it pays pick your portfolio based on ethics, read Socially Responsible Investing Vs. Sin Stocks and Socially (Ir)responsible Mutual Funds.)

Selected Services

Expect a downturn in the service industry as a whole, as companies and families are willing to do more themselves to save money. A certain class of service providers will see an upswing during hard times though. Companies that specialize in upgrading and maintaining existing equipment and products see their business increase as more clients focus on working with what they have now rather than buying a newer model. (Read Less Trash For More Cash to learn how eco-friendly practices can be good for your wallet as well as the planet.)In the real estate industry, they say renovators hire as builders fire, and this holds true for many other industries as well.

The Statics

In a recession, simply carrying on with business as usual can be an achievement. Pharmaceuticals, healthcare companies, tax service companies, gravediggers, waste disposal companies and many others are in a category that, while not jumping ahead during a recession, can plod along while other companies suffer. This is simply because people get sick, get taxed and die (not always in that order) no matter what the economy is like. Sometimes the most boring businesses offer the most consistent and, in context, exciting returns. (Read A Checklist For Successful Medical Technology Investment and Build Your Portfolio With Infrastructure Investments to learn more about putting your money into these stable industries.)

The Benefits Of Recession

The biggest benefit of hard times is that companies get hurt for inefficiencies that they laughed off in better times. A recession means general fat trimming for companies, from which they should emerge stronger, and that's good news for investors. One of the best signs is a company in a hard-hit industry that is expanding anyway. For example, McDonald's continued to grow in the 1970s downturn even though restaurants generally suffered as people cooked rather than going out to eat. Similarly, Toyota was opening new American plants in the 1990s downturn when the Big Three were closing theirs due to falling sales for new cars. (Read more about the 1970s economy in Stagflation, 1970s Style.)A recession can be a blessing for investors, as it is much easier to spot a strong company without the white noise of a strong economy. (Read how certain strategies can help you cut through market noise in Trading Without Noise.)

Waiting It Out

Although it is good to know which companies excel in a recession, investing according to economic cycles can be difficult. If you do invest in these industries during a recession, you have pay careful attention to your investment so you can readjust your portfolio before the economy rebounds, stemming the advances the recession-proof industries have made. (Read more about how to take advantage of market fluctuations in The Ups And Downs Of Investing In Cyclical Stocks.)Some of the companies performing well in a recession will also perform well in a recovery, and more will change their business to take advantage of it, but many will be passed by their toughened-up brethren that race ahead in bull markets – financials, technology firms and other faster-moving industries. With the proper timing, however, these industries can provide a buffer within your portfolio while you wait for your high fliers to take off again. For further reading, see Four Tips For Buying Stocks In A Recession and Recession-Proof Your Portfolio.

by Andrew Beattie, (Contact Author Biography)Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.

http://www.investopedia.com/articles/stocks/08/industries-thrive-on-recession.asp?viewall=1

Recession: What Does It Mean To Investors?

Recession: What Does It Mean To Investors? by Investopedia Staff, (Investopedia.com)

When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.

The Phases of the Business Cycle

In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.

Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.

Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.

Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.

Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.

Notice in the above diagram that the peak and trough are merely flat points on the business cycle at which there is no movement. They represent the maximum and minimum levels of economic strength. Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.

To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.

Recession Versus Expansion

Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation. The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:

Employment
Personal income
Sales volume in manufacturing and retail sectors
Industrial production>

By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion. The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)

What Does this Mean for Investors?

Understanding the business cycle doesn't matter much unless it improves portfolio returns.

What's an investor to do during recession?

Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)

First, remember that a bear market does not mean there are no ways to make money.

Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)

Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.

There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.

Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you.

For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.

Conclusion

The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.

by Investopedia Staff, (Contact Author Biography)

http://www.investopedia.com/articles/02/100402.asp