The Economic Climate (8): Cold Climates and Recession

Reviewing the recessions in US since World War II to 1995:  all last an average of 11 months, and cause an average of 1.62 million people to lose their jobs.

In a recession, business goes from bad to terrible. 

Companies that sell soft drinks, hamburgers, medicines - things that people either cannot do without or can easily afford - can sail through a recession unscathed. 

Companies that sell big-ticket items such as cars, refrigerators, and houses have serious problems in recessions.  They can lose millions, or even billions, of dollars, and unless they have enough money in the bank to tide them over, they face the prospect of going bankrupt.

Many investors have learned to "recession-proof" their portfolios. 

• They buy stocks only in McDonald's, Coca-Cola, or Johnson & Johnson, and other such "consumer growth" companies that tend to do well in cold climates. 
• They ignore the likes of General Motors, Reynolds Metals, or U.S. Home Corp.  These are examples of "cyclical" companies that suffer in cold climates. 

Cyclical companies either

• sell expensive products,
• make parts for expensive products, or
• produce the raw materials used in expensive products. 

In recessions, consumers stop buying expensive products. 

The Economic Climate (7): The economy has gone from hot to cold in a matter of months.

A hot economy can't stay hot forever. Eventually, there's a break in the heat, brought about by the high cost of money. With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth. So they stay where they are and put off buying the new house. Or they keep their old clunkers and put off buying a new car.

Suddenly, there's a slump in the car business, and Detroit has trouble selling its huge inventory of the latest models.  The automakers are giving rebates, and car prices begin to fall a bit.  Thousands of auto workers are laid off, and the unemployment lines get longer.  People out of work can't afford to buy things, so they cut back on their spending.

Instead of taking the annual trip to Disney World, they stay home and watch the Disney Channel on TV.  This puts a damper on the motel business in Orlando.  Instead of  buying a new fall wardrobe, they make do with last year's wardrobe.  This puts a damper on the clothes business.  Stores are losing customers and the unsold merchandise is piling up on the shelves.

Prices are dropping left and right as businesses at all levels try to put the ring back in their cash registers.  There are more layoffs, more new faces on the unemployment lines, more empty stores, and more families cutting back on spending.  The economy has gone from hot to cold in a matter of months.  In fact, if things get any chillier, the entire country is in danger of falling into the economic deep freeze, also known as a recession.