Some really troubling economic signs

Last week, the unemployment rate rose to 6.5%, the highest it has been since early 1994. However, that’s not the big story. The big story is how fast it’s rising given how early it is in the current recession. The last recession ran from March 2001 through November 2001. The unemployment rate started rising two months before the recession originally started, continued slowly upwards, but didn’t peak until June 2003 - almost 2 years after the recession ended. The recession previous to that ran from July 1990 to March 1991. However, unemployment didn’t peak until June 1992. More than a year after the end of the recession. I think we’re likely to see a similar pattern this time - with the recession ending in mid-2009, but unemployment continuing to rise for another 1-2 years after that. I would not be surprised to see >10% unemployment by mid-2010.

My other big concern is debt-to-GDP levels. Over the past few years, these have risen to levels that are a multiple of previous historic highs. Not just in the US or Europe, but in pretty much every industrialized nation in the world. A good part of this was a result of the global housing boom, which is now over. The obvious question is - what happens when you combine an already crushing debt burden with an economic slowdown, falling asset prices, and now rising unemployment (and thus falling personal income). The immediate answer, on an individual level, is default/bankruptcy. The longer term consequences for the economy (getting stuck in a vicious downward cycle) are even more stark. Then there’s the fact that this is the first time post-WWII when every major economy is heading into a recession together.

I’m not predicting an end of the world scenario. I’m not even predicting a repeat of the Great Depression (it’s unlikely simply because the central banks of the world are in panic mode right now, doing everything they can specifically to prevent it, something they didn’t do in 1930). I am predicting what will probably be the worst economic recession since the Great Depression. We’ve gotten used to recessions being short and shallow over the past 25 years, and this one will be neither. I hope I’m wrong, but the evidence points in this direction.

What can you do?  Start making plans for handling a job loss.  Get in touch with former co-workers, revive your old networks, start putting feelers out with other employers, update your resume, and update your skills to align with whatever skills in your field are currently in demand.  Do not take on any more debt, and to the extent you are able (without negatively impacting your savings) start paying down existing debt.  Increase your savings.  Cut out spending on unnecessary items.  Look for ways to do more with less.

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