The proxy war with Iran militias in Iraq will kick off the recession which will last a long time.
Get Ready For Negative Interest Rates When Next Recession Hits
Wall Street is still hung up on whether the Federal Reserve will or will not raise interest rates further this year, y et for many Fed officials an even bigger question looms: What should policymakers do when faced with the next recession?
The Fed pivoted rather quickly in recent months from expecting as many as four rate hikes this year to hinting at as few as none at all. That was in reaction to substantially weaker growth prospects abroad and a tightening of financial conditions at home, as confirmed in minutes to the Fed’s May meeting .
With benchmark borrowing costs still in a 2.25% to 2.5% range after several increases starting in December 2018, policymakers worry about their limited ability to reduce interest rates in response to a future economic shock that causes a spike in unemployment.
The Fed has historically slashed rates by as much as four or five full percentage points in response to recession. It will clearly lack the room to do so the next time around.
That’s why policymakers have made clear the fairly unusual but also remarkably powerful tool of asset purchases, known as quantitative easing and used extensively during and after the financial crisis of 2008, will remain on the table for future slumps.
Tension between superpowers. Tariffs. Rising interest rates. Volatile markets. Stagnant wages. Brexit. A flattening yield curve. Most of all, a 10-year run of relatively stable economic growth that is long overdue for a correction.
“There will be a recession because there has to be,” says Robert Alessandrini, finance chief at IT staffing and consulting firm The Judge Group. His peers agree.
However, few expect the downturn, likely beginning this year or next, to resemble the Great Recession of 2008-2009. Then again, before that deep trough hit, few foresaw the degree of financial devastation it would ultimately wreak.
Whatever the depth and duration of the presumed economic slump, CFOs — especially in such vulnerable industries as manufacturing, retail, construction, technology, and travel/hospitality — have decisions to make in advance. What should they do to get ready?
No single strategy stands out. CFOs are mostly blocking and tackling — shoring up balance sheets, locking in credit lines, and shaving costs, while determinedly maintaining investment in key growth initiatives.
But how they choose to execute such strategies, which additional ones they employ, how agile they are in doing so, and the psychology of their response to stressful times may determine how well (or whether) their companies survive the coming storm.
Slowing It Down
Caution is also the watchword for early 2019 at FLIR Systems, a $2 billion manufacturer and distributor of thermal imaging cameras and sensors.
“We’re making sure to start off the year slowly with respect to new types of investments, and challenging ourselves on new hires — do we really need them?” says Carol Lowe, FLIR’s finance chief. “We’ll let the quarter materialize and see how growth goes, and then maybe we can loosen the purse strings a bit. If you start out the year spending at higher levels, it’s harder to rein it in later.”
Where FLIR has the flexibility to do so, it is also working with suppliers to move some of their production out of China to avoid steep tariffs. Lowe also recently instituted more discipline in the process of reviewing internal requests for capital.
Some businesses may have very few levers to pull to improve their situation entering a recession. Alliance Lumber, a $260 million distributor of lumber products in Glendale, Arizona, saw revenue decimated by 90% during the Great Recession. The company laid off all of its hourly employees (the bulk of its workforce) and management took pay cuts.
This time Alliance is expecting only an 8% to 10% revenue pullback, based on leading indicators like a recent dip in new home construction and a gathering trend toward smaller homes being built. But “if there is another recession like 2008, all bets are off,” says CFO David Rau.
The company’s problem is that it’s a commodity-type business. The price of lumber is what the mills charge. Alliance can try to tick pricing upward for its homebuilder customers, but “if we get too out of step with the market we could lose a lot of market share,” Rau notes.
Make these four moves now to prepare your finances for the next recession.
- Build your emergency fund
You don’t want to think about losing your job or some other unexpected emergency, but it’s essential that you prepare for it.
If you’re unexpectedly out of a job because the economy is going through a difficult time, you may have a harder time finding a new job with the same level of income. Building an emergency fund to cover at least six months of expenses will help you sleep at night if the economic starts to decline.
If six months of savings is too audacious of a goal at first, start small by setting up a direct deposit into your emergency savings account. Also create a budget and analyze your spending to look for areas where you can cut back; put any extra savings into your emergency fund.
In the event of a layoff, you could get unemployment and hopefully a severance package, but have an established emergency fund is key if you’re unemployed for an extended amount of time.
- Pay off debt if you can
Now is an excellent time to review your debts. Could you easily pay off some debts if you prioritized them for the next year? Could you consolidate several credit cards onto a no-interest credit card to pay it off faster? What if you paid off your business loan early?
There are a number of steps you can take to get out of debt. Two popular ones are the debt ladder and the debt snowball:
Debt ladder: Start by prioritizing accounts with the highest interest rate. As you’re putting extra money toward that account, you make minimum payments on the others. When you pay off the account with the highest interest rate, move down a rung of the ladder and apply all your extra payments to the account with the next highest rate.
Debt snowball: This method prioritizes paying down the accounts with the lowest balances first. You put extra money toward the account with the lowest balance, and once that one is paid off, you start attacking the next one.
If the economy moves into a recession, you wouldn’t want any debt hanging over your head.
- Review investment risk
Review your investment portfolio to make sure it aligns with the level of risk you’re comfortable with. If you’re close to retirement, you likely don’t want to have all your money in riskier stock funds.
Think about how your investments would do if another recession happened. If you’re not comfortable seeing them drop as much as they did in 2008 and taking as long as they did to recover, you should think about a plan to get your money into safer investments over time.
You may be invested in real estate or taking on extra business risk. Take some time and be honest with yourself if anything your doing could collapse under negative economic times. Have you gone through worst-case scenarios? Are you realistic in your expectations for how long you can keep making money doing what you’re doing?
- Pay more attention to economic news
You don’t need to be an expert to have an idea of whether economic times are good or bad. If you pay attention, even just a little bit, you can get a sense of how things are currently going.
Typically, before a recession, there are leading indicators that precede a recession. One of the biggest signs is an “inverted yield curve.” A simplified explanation for this is when the short-term loan rates (two-year Treasury) are higher than the long-term loan rates (10-year Treasury). Interest rates normally are higher the longer the term of a loan, but before a recession, they can invert.
To stay informed, you could occasionally search online for this term. If you start seeing articles that the curve is inverted, you know you have about a year or so get your finances in order because a recession could be coming.
However, it’s important to note that no indicator perfectly predicts recessions.
Be aware the economy has cycles. We have been in the growth phase of the cycle since 2009, and that will eventually change. Before the economy changes, take stock of your financial situation to make sure you’re prepared.
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