Monday, January 2, 2012

Boom vs. Bust

In economics we teach something called the business cycle.  The idea is that economies tend to have ups and downs.  We can be in a growth or recessionary part of the business cycle.  While it may feel as if we are in a recessionary cycle, you need to know that by classic definitions of growth and recessions we have been in a growth phase since the third quarter of 2009!

The following graphic shows the growth and shrinkage (recessionary) cycles.

Gross Domestic Product is a measure of the total wealth generated inside of our country.  A recession is defined as two consecutive quarters of GDP shrinkage. 
Source: Bureau of Economic Analysis
Starting in 2007 we have had quite an economic ride with ups and downs.  Growth slowed again in 2011 but never went negative.   Remember that it is possible for a company to have more profits with less workers.  This is due to ever increasing productivity.  This is how the nation can have a growth in GDP with a decline in jobs.

The following chart measures unemployment levels:

Source Bureau of Labor Statistics

Are you are still with me?  Then you deserve the punch line:  In your life you will face many turns of the business cycle and you should plan for these ups and downs.

Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest. How long will you lie there, you sluggard? When will you get up from your sleep?  A little sleep, a little slumber, a little folding of the hands to rest— and poverty will come on you like a bandit and scarcity like an armed man.    Proverbs 6:6-11

There will be times when if are breathing and willing to work you can find a job and get pay raises easily.  There will also be difficult times where work is hard to come by.  Each phase of the business cycle requires a different strategy.

During Good Times
Resist the urge to increase spending and begin putting away savings for the lean years.  Do an analysis of your skills to see where you are vulnerable for any possible downturns.  Maybe you can work less and bank those hours towards college credits.  Some companies are more liberal with benefits like subsidized education.  Take advantage of this and invest in your education.  Increase giving.  God had given you more so you should bump up both your tithe and giving during good times.  Resist the urge to job hop looking for continual raises.  In union jobs, you are giving up seniority when you move companies.  The bad times are coming so you should prepare.  If possible use this period to start a sideline business. Resist the urge to get caught up in get rich quick scams and focus on the basics for growing wealth.

During Bad Times
Be thankful for what you have and do not harden your heart towards those who drop into poverty.  Help where possible, hire someone if you can.   If you lose your job, don’t give up looking ever.  Drastically cut spending where possible to preserve savings for a possible long unemployment.  Divide time between your sideline business and job hunting.  You may have to adjust your expectations and take a lower paying job.  If the new job is lower paying you must adjust your spending to the new reality.  This is hard, but the whole family needs to take a pay cut.  Ironically this is the best time to invest.  It may be scary to think about investing because you may be afraid of locking money away that you may need due to a job loss.  Realize that your job is not secure even if it seems secure, so you must take reasonable investment risks at times.  This may be the best time to buy your first house.

Learn this lesson about the current economic climate.  You can’t trust your feelings to gauge the times so you should follow these basic strategies so that you can safely ride out the business cycles that you will experience throughout your life.  Many of the people around you will be reacting improperly because they do not understand the business cycle.  When investing the rule is to buy low and sell high.  This sounds easy but will cut against your feelings because the best time to buy will be when prices are falling.

You don’t operate in a bubble and not everything is under your control.  Even with good economic decisions you may still get wiped out through some freak event.  This is the natural hazard of being a living being on this planet (Ecclesiastes 9:11).  The idea is to limit self-inflicted financial wounds.