Friday, May 30, 2008

It's the economy stupid!

Much has been said recently about the economy. Are we in a recession or not? Several news people and politicians are looking for people who will say we are. It seems everyone believes we are in a recession, but it's hard to find someone in authority to agree.

Well there's a simple reason for it. We aren't in a recession. By definition, a recession occurs when the GDP goes down for two quarters in a row. (The GDP is the cumulative output of our nation - think of it as a paycheck). Not only have we NOT had two quarters of declining GDP, we haven't had ONE quarter of declining GDP.

Let's look at the details for a little bit. A paper in the UK says "US preliminary GDP for Q1 duly came in at plus 0.9pc which rather makes a mockery of all that talk of recession over the past six months or so."

But wait, you may say "The character of this recession is different than those of the past" just like Bill Fox, UT economist. "High gasoline prices, slow consumer spending and declining employment rates do not bode well for a quick recovery this time around, Fox warned." Wow, this sounds serious. It has to be a recession with a UT economist sayign stuff like this.

So what is it? Recession or no? Well, more importantly, WHAT DIFFERENCE DOES IT MAKE? If we could get every economist to agree that we are indeed in a recession, what should we do differently? The government has already issued everyone a stimulus check (which I still think is stupid and a bad long term decision).

I say it doesn't matter. I know my personal financial situation (do you know yours?). I know what my income and outgo levels are. I know what my major expenses are that are coming over the next few years (son going off to college). I know that both of my cars have over 100,000 miles on them and they could die tomorrow (I hope not).

This didn't happen to me overnight, my son has been preparing for college for 18 years. My cars have been going up in miles for 4 & 5 years. I've made slow steady steps to make sure I was ready for this day. So what will I do about the recession? What should you do?

Answer is simple. Just keep doing what you should have been doing all along. Save for expected expenses. Spend less than you make. And plan to make more. I believe economics is very personal, and reaction to it should be personal also.


Anonymous said...

Good points, Randy. It is sort of like investing in the stock market. You shouldn't be too risky with your spending (like only going after super high yields) and shouldn't get too conservative (you'll never retire investing just in CDs). We should set aside money as we go along so that when downturns happen we'll be ready. You know you'll see some personal / national downturns over the decades, so there is no need to panic.

Randy said...

Thanks Neil. I hadn't thought about the analogy to retirement.

Re: you'll never retire investing just in CDs - Somehow I think Warren Buffett or Bill Gates could.

But you're right, things go up, things go down. We each need to be responsible for ourselves and not count on the government to do it.