How Does a Recession Hurt ME?

[Green Tea]

I hear the news, and am interested in how the economic downturn, I'm not calling it a recession yet, hurts the average family. What changes on a day to day basis? What hurts the most? What changes occur in an average family during such times?

 

[starwood]

As for me, everytime the fed lowers the interest rate the interest I get on my ING and HSBC accounts drop. I was getting over 5% before this whole thing started and I'm sure in a day or two I won't even be getting 4%.

 

[Toby'sFriend]

Do you have kids in Public school?

Everytime the economy tanks state and local budgets get hit HARD. When people make less money they spend less money, income tax collections and sales tax collections go way down.

School budgets get really tight during these times.

Then you have declining property values, declining 401k values

Businesses go bankrupt. Services such as Doctors Offices, Hairdressers, local restaurants --- gone.

 

[fakereadhed]

What changes occur in an average family during such times?

You or your spouse loses their job, then you lose the house, etc. Move to my area and you'll understand.

 

[SaveTheSeaTurtles]

Hi. I just wanted to throw in my two cents. (Great subject, btw!)

I am in the construction industry,employed as a purchasing manager. This was a part of the economy that saw a huge downturn before perhaps some other areas. We build new residential homes. I have many friends - well qualified & well-respected in the industry, who are now out of work and have been for several months because the market is not there to support new homes being built. When housing suffers, there is a fallout to other people not directly connected to residential housing but they feel it too. Suppliers, fabricators, contractors (just think about all the parts and pieces that go into building a house!), transportation industry - all of their families are feeling it. It is a domino effect.

The fortunate builders are the ones that did not "go crazy" with the boom that we experienced for so many years, limiting their land position exposure. The custom builders will survive - if they can keep a min. of contracts coming in. Many buyers created problems for themselves when they signed contracts for mortgages that they could not afford. Our industry is much more affected here than in other areas of the country that perhaps did not experience the high volume of sales that we were fortunate enough to have for many many years. So many people want to live in the warm climates...

The media, I think, is partially responsible for creating a small ripple of panic at the moment, but that is what the media does best. No one can argue, though, that things have hit a downturn. People just need to limit their spending, don't buy what you cannot afford and use this time to decrease your debt if you have the means to do so. Too many people are so worried about keeping up with the latest trends and what their neighbors are buying that they overexpose themselves and increase their risk.

Many people do not know if they will have a job next week - and that is scary. Homebuilders are cutting back, paying less and expecting more just to keep the doors open & stay alive. Some companies have already gone under and others will follow. We are all cutting back on spending - because we have to.

I hope there is a turnaround soon. Our industry is predicting it will not recover until 2010. I pray they are wrong.

 

[Kay1]

This feels more like stagflation to me because of the high food and gas prices. Because of the high prices, this would be a very tough time to become employed or lose income.

It's a good time to save as much as possible so we shaved 5 days off our usual vacation. I'm also going back to "black belt" savings at Publix. No more bleu-cheese-stuffed olives for me!

 

[Dory's Twin]

higher gas prices, food prices, home heating prices, water prices (okay, utilities in general) take most of our discretionary income....

we have to give up on eating out, traveling, cut back on our clothing purchases, fun times out, I stick very close to a food budget...extras are out...

All the things we cut back on have a ripple effect to others....

 

[MyGoofy26]

Good question. I keep reading and hearing about this, but I'm not "feeling" it, you know? I'm interested in all the responses.

I know there are things that do affect me (higher costs) but I just started my first "professional" job since college last year and last week got my 2nd raise already, which means my income is increasing quite a bit with the cost of living so I'm not feeling it like others. And since I just started putting money into a 401K, I don't have a lot to lose. It's dropped $5 total, and I'm still up from what I've paid in so far. I'm sure I'd be more panicked if I was talking about tens or hundreds of thousands invested like some people.

Maybe some of those that are better with this can jump in, but it seems like this could be turned to a positive for someone like me. With the housing market taking a dive, it seems like I could save for the next couple years and sort of "take advantage" of the situation? The fact that all of this hasn't really affected me financially seems like I could spin it in my favor. Or is that wishful thinking?

I'm feeling pretty good about my job too. We're actually seeing more work and money lately. I'm the whole billing/accounting department and our recievables are up 50% (for a few months it doubled) and now that the holidays are over, we're getting booked up again. At one point last week I had $0 in payables - and the week before when it was only a couple thousand, the owner said she hasn't seen that since 1994. To compare, we had about $70,000 in payables when I started. Also got a few of the company credit cards paid off or way down in the time I've been there. So it seems like this downturn isn't working its way to us (yet) . . . it's a court reporting agency and lucky for us, people never stop suing, LOL.

 

[Disneyoverload42]

Cost of goods are higher - but actually gas where I live is down to 2.84/gal - I already live WAY below my means (thanks to debt out the wazoo) so maybe I don't see it as much as someone who regularly spends $100 a week on groceries or regularly buys clothes/furnishings etc. I haven't had disposable income in years My retirement investments are so little and I'm young enough to recoup - plus I'm a long hauler I don't care what the market does today or tomorrow - it's 15 years from now that I'm thinking about.

I personally think that it is more media hype and bad personal finances (which the gov can't do anything about anyhow) than anything. No matter what the government does, it won't help the person who has 1/2 their income going to car payments, 1/3 going to a house payment (probably interest only) and spend the remainder on credit card payments. Money is finite. This seemed to get kicked off with the acknowledgement of the subprime loans crisis where people really couldn't afford the houses and the banks finally realized it.

If we go into a recession/depression, we'll get through it - our grandparents did (although they didn't have debt). We'll trudge on with extra jobs and cutting back and going back to basics. What else can you do? I refuse to live in fear of something that hasn't happened yet.

<ok, the soapbox going back under desk - somehow keeps scooching it's way out...>

 

[bdcp]

I just wish some people wouldnt' panic. Interest rates are historically low even before today's cuts and unemployment rates are still very, very low. People panic and start cancelling extras, trips, etc and it dominoes which makes things worse. Gas prices have been high for over a year yet some are talking like this is new. Property taxes went really high a couple of years ago and utilities have always raised prices. I guess I just don't see the sky falling, but i do see the Media having a field day. We're in a home we've been in for 4 years and that we put 20% down on and have seen an increase in price before the drop and we're still ahead of what we started with. My DS(24) is looking to buy and the readjusment of prices is great news for him and other first time buyers. The mortgage companies didnt' cause the defaults on loans. People who took on loans they knew they could never afford if rates rose caused their own problems by buying a lot more home than they could really afford. It's not the government's job to rescue people because they make stupid decisions. Long term, the stock market will make money. It always has.

Homebuilding has always been a volatile career field. I doubt there's anyone who's been in the field for 25-30 years that hasn't been affected over the years. Everything is cyclical. You just have to prepare for it the best you can.

I saw an economist today who said the fed needs to back off and the government needs to stay out of it because the economy needs an adjustment and it will take care of itself. The government cannot fix the free market economy we live it. They just muddy the waters.

Disneyoverload, can I join you under your desk?

 

[What are we doing?]

I personally think that it is more media hype and bad personal finances (which the gov can't do anything about anyhow) than anything. No matter what the government does, it won't help the person who has 1/2 their income going to car payments, 1/3 going to a house payment (probably interest only) and spend the remainder on credit card payments. Money is finite. This seemed to get kicked off with the acknowledgement of the subprime loans crisis where people really couldn't afford the houses and the banks finally realized it.

If we go into a recession/depression, we'll get through it - our grandparents did (although they didn't have debt). We'll trudge on with extra jobs and cutting back and going back to basics. What else can you do? I refuse to live in fear of something that hasn't happened yet.

Well said.

I just wish some people wouldnt' panic. Interest rates are historically low even before today's cuts and unemployment rates are still very, very low. People panic and start cancelling extras, trips, etc and it dominoes which makes things worse. Gas prices have been high for over a year yet some are talking like this is new. Property taxes went really high a couple of years ago and utilities have always raised prices. I guess I just don't see the sky falling, but i do see the Media having a field day.

The media seems to be generating this crisis.

Yeah, there are some lenders and insurance companies that are losing a lot. Yet, they're the ones offering and insuring the interest only loans. They knew it was risky for their borrowers and the lenders still were making the loans.

Then, we have the "poor" borrowers that bought houses that they couldn't afford on the expectation that the real estate market would continue to boom. They gambled and lost. There are exceptions of people with sad stories, but policy shouldn't be written on the exceptions.

The politicians are throwing our money at the problem because they want to be re-elected in November. People are learning that if they whine enough, the politicians will try to fix it for the votes.

Remember, the unemployment rate (5.0% in Dec 2007) is still very low (comparable to the early 1960's) and nowhere near the 10% of 1982.

For a list of historical unemployment rates by month see

http://research.stlouisfed.org/fred2/data/UNRATE.txt

Inflation hasn't been that bad compared to historical data either

http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=0

I lived through the 70's and 80's. I'll manage through anything that comes.

 

[JoyG]

We're feeling pinched b/c my salary has only gone up by $10 a week in the past 4 years.

The tuition at my kids' school went up $400 a child this year, and it's going up another $400 per child next school year. We might have to pull them out after this year. If they loose more families, that will affect tuition even more.

 

[dvcgirl]

I think this is a great idea for a thread.

First of all, I do agree that this thing is in the media, and it's here to stay. And that will affect spending. People will cut back and that would affect growth. However, even if the "R" word was never out there, the poop would hit the fan sooner or later. We're in the middle of round two of a serious credit crunch and that in itself is enough to throw us into a recession. I've heard people say that if the media didn't hype the housing bubble was about to bust that it never would have happened. As if houses would just keep skyrocketing in prices until the end of time. Same thing here.

The 2007 Q4 retail numbers were pretty bad, and that's before the "R" word was out there in full force. Of course, they wait until *after* the holiday shopping season for that news . The fact is that this was the worst holiday season in 5 years. And the concerning part of that fact is that while people spent less than the experts projected, their credit card debt, and the number of credit card defaults increased dramatically. That tells me that budgets are tight, and that maybe people are using credit cards more than ever to pay bills and buy necessities. All of this means that there is a fair percentage of people out there who are tapped out. Remember, consumer spending is 72% of the GDP. If consumer spending drops by just 1%....it's a big, big deal. But doesn't that make you think that this insanity has to end. We can't just keep taking on more and more debt, save nothing and spend more, year after year after year.

The key to how bad this whole thing will be from everything I hear is the jobs situation. I hear the bulls say that corporate America isn't overstaffed like they were in 2001. So there shouldn't be lots of layoffs.....not a lot of hiring either, but if we can avoid lay-offs, that will sure help. If the consumer really puts on the brakes, and that hasn't happened in awhile, then more jobs will be lost and this will be a deeper recession.

Another serious factor this time over 2001 is not that this could be a consumer-led recession, but also that we have the highest inflation that we've seen in 17 years. And *that's* why there's panic in the air.

My other point is that while things may feel okay now, it takes time for the effects to trickle down. When the tech bubble burst and we went into recession in 2001, lots of jobs were lost right away, but my DH didn't lose his until 2003...which is when the market bottomed.

 

[lastminutemom]

Clark Howard often talks about how diverse the American Economy is and how certain industries have been in bad shape for a long time (car manufacturing for example, maybe) and others have hit a bad spell (homebuilding, real estate, some sectors of the finance market), some won't be impacted as much.

My husband and I own a business that does over 50 percent of its income overseas. We are doing great, cause our customers are actually spending more... cause their money seems to go further, but our costs are fixed. Anyway, we do have a couple of employees overseas that we have had to raise their salaries to compensate for the decline of the dollar, but we are still ahead.

On a personal level, I do notice that groceries have gotten much more expensive...

 

[camdensmom]

It'll be interesting to see what happens after people get their tax returns Typically that is when a lot of frivilous spending occurs (esp. vacations).

As for how it effects me...

My husband's company recently relocated and the commute is now more than double. However, we now view it as him not having an option to look elsewhere because you don't want to be the "new hire."

 

[Green Tea]

The school budget comment is interesting. I wouldn't have thought about that. Our system seems to struggle anyway so no telling what a downturn might do to it. The construction industry scenario does seem frightening.

What makes things like mortgage interest rates go sky high? Seems like a bad economy would, but today rates drop again. Is that where the government trying to fix things comes into play? Rates would be going up naturally if not for things like these key interest rate cuts?

 

[dvcgirl]

Well said.

The media seems to be generating this crisis.

Yeah, there are some lenders and insurance companies that are losing a lot. Yet, they're the ones offering and insuring the interest only loans. They knew it was risky for their borrowers and the lenders still were making the loans.

Then, we have the "poor" borrowers that bought houses that they couldn't afford on the expectation that the real estate market would continue to boom. They gambled and lost. There are exceptions of people with sad stories, but policy shouldn't be written on the exceptions.

The politicians are throwing our money at the problem because they want to be re-elected in November. People are learning that if they whine enough, the politicians will try to fix it for the votes.

Remember, the unemployment rate (5.0% in Dec 2007) is still very low (comparable to the early 1960's) and nowhere near the 10% of 1982.

For a list of historical unemployment rates by month see

http://research.stlouisfed.org/fred2/data/UNRATE.txt

Inflation hasn't been that bad compared to historical data either

http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=0

I lived through the 70's and 80's. I'll manage through anything that comes.

And I think that's a good attitude to have....we'll all get through this. It will be tougher on some than others.

But to say that this is just a couple of banks and some insurance companies that over-leveraged themselves....well, I think that is underestimating the problem here. This isn't just some banks making bad loans....this is banks making bad loans, then bundling them all together and throwing them out into the market to be sold as securities. This spread the pain throughout the economy. This is different from the early 90s when it was mostly corporate real estate that deflated.

The companies that insured those securities against losses for the banks are essentially bankrupt. They can't cover those losses. You know why? Their business model had the housing sector growing....forever. That's right, their model never factored in the possibility of a drop in house prices. So, it was easy money when the market was on fire, but a disaster as people started walking away from homes in droves.

And so until housing bottoms and all the foreclosures are in....the banks won't know how much they've lost. Until then....lending won't get back on track and that will slow growth in the economy. Our economy can't function without banks loaning money and people and businesses taking on debt. That's what makes the whole thing hum. Deals won't get done at the normal pace, mortgages won't be underwritten at a normal pace, and loans won't be made to small (or large) businesses at a normal pace.

We're talking about billions and billions in losses to date with a whole lot more coming. Banks don't trust each other and are tightening lending big-time to hold onto capital....because even the banks don't know how bad their losses are going to be. This affects consumer lending too (CCs and auto loans), which could further slow the economy.

And so what is the Fed doing....lowering the Fed funds rate, to make borrowing cheap again, so we can start this mess all over again. And by dumping money into the system in huge amounts, don't think that inflation can't get a whole lot worse.

I do agree with you on the fact that the government should stay the heck out of this. When you have excesses like we've experienced in this economy over the past few years, we need to trim the fat and the only way to do that is over time. Instead, the government will jump in, add the national deficit, lower rates and then a few years down the road we'll have a good old fashioned 70's style recession.

 

[dvcgirl]

This feels more like stagflation to me because of the high food and gas prices. Because of the high prices, this would be a very tough time to become employed or lose income.

It's a good time to save as much as possible so we shaved 5 days off our usual vacation. I'm also going back to "black belt" savings at Publix. No more bleu-cheese-stuffed olives for me!

I agree...we've cut back too. We saw this coming this time...and got very defensive in our portfolio too, so I'm thankful for that. And I'll be the first to admit that the media can certainly affect your mind-set. Now it's almost a self-fulfilling prophesy to a certain degree. People will likely cut back and if they do that in a serious fashion, we'll end up in a nasty recession. Chicken or egg, it doesn't matter which came first, it's the end result that matters.

So, even though we have no debt and a fully funded emergency fund, we'll cut back on spending and save more. I have no reason to believe that DH will lose his job, there's certainly no talk about it, but you just never know. We're finishing up a "No Buy" January, and it was actually pretty cathartic! Our only spending was on household bills, gas, groceries and vet bills (coming out of the vacation fund for now). We haven't eaten out, and we haven't bought one thing that we didn't absolutely need. We decided that we're up for 1/2 of our normal monthly discretionary spending for awhile....if spending nothing was so easy, than 1/2 should make us feel like we're rich! .

I certainly don't feel like it's my patriotic duty to get out there and spend as much as I can. And so I won't participate in the government prescribed insanity.

 

[TheLittleRoo]

Recession affects everyone eventually. Think of it as receding water; all boats are lowered. I'm sure cuts will be coming to my line of work. I'm in corporate credit cards (T&E, the first place companies cut their budget) and our forecast for 2008 will be hit as the F500 cut their spending budgets, therefore our manager positions will be cut. That means my kids won't be in daycare, we won't be spending as many retail or dining out dollars, luxuries are OUT, etc.

My husband, OTOH, is with the government in law enforcement, so he's virtually bulletproof (pardon the pun) from losing his job. That's a blessing. We often lament that he could be earning so much more in the corporate world, but he always points out the job security in his position. Now he's finally right!

I do think the media hypes this into more than it has to be. Just like today, even before the markets opened, the Yahoo headlines were screaming about the impending plummet in today's market. Well, guess what? If the average Joe panicked after reading the headline, and called his broker to SELL, SELL, SELL, which came first? The panic or the event?

It reminds me of learning about the Depression, and wishing I could go back in time with pockets of present value money, and becoming the next Rockefeller!

 

[problemchild718]

We too have seen this coming. We have been aggressive in getting rid of debt and cutting back for a year or so. We have been trying to pad our emergency fund and are using coupons religiously. We made some adjustments to our investments several months ago. We are really feeling the pinch with energy costs (gas and heating oil). We have considered changing jobs to something closer to home, but like the PP we don't want to be low man. We are not eating out or vacationing nearly as much as we have in the past. I haven't bought clothes in months for myself. (somehow the stuff in my closet looks better when I know its paid for) My kids have been bringing lunch to school and we have been planning meals and having more 2fer dinners (chicken one night and a variation of it another). I too believe the media is fanning the flame here. My family and I will be cautious, but not living in fear