In February of 2007 former Federal Reserve Chairman Alan Greenspan stated that it is “possible” that the U.S. economy might fall into recession by the end of the year.  He also shared that the continued US economic expansion has produced signs that the current economic cycle is coming to an end.  If Mr. Greenspan is correct, what might we do to prepare for a recession?

There are a number of indications within the marketplace that would predict that a recession is imminent in the US.

Housing Market Slowdown

One cause of worry is the weakening housing market.  According to a National Association of Realtors forecast, existing home sales will decline 4.6% this year which is a decrease from its previous forecast of 2.9% decline.  New home sales forecast by the NAR were expected to plummet even further and were projected to fall by 18.2% (previous estimate of 17.8% decline) Chicago Tribune, June 7th, 2007.  However, Mr. Greenspan stated that the declining housing market has not shown any negative effects on the market; nonetheless, it is hard to imagine that the flood of foreclosures within this market will not have some negative effects on the health of this market.

Rising Price of Gasoline

As June marks the beginning of another hurricane season there is increasing concern to the already pressing issue of an unusually high number of refinery outages this spring.  There is a large number of US gasoline refineries located among the Golf Coast which is a hurricane prone area.  Just recently, the wrath of Hurricane Katrina resulted in the closure of some of the coastal oil refineries having a devastating impact on the supply of gas to the country.  With such a very tight supply-demand equation with the refineries, these closures resulted in the increase of gasoline prices.  In a June 7th, 2007 report from the Associated Press it was stated, “The U.S. has experienced an unusually high number of refinery outages this spring.”  The results of this have been reflected with our rising gas prices around the country.

Increased Costs and Uncertainty in Iraq

According to the National Priorities Project the cost of the Iraq war will surpass $456 billion if Congress passes legislation to approve additional spending on the war in Iraq. A total of $378 billion has already been spent.  Monetary costs have significantly weighed this country down economically; however, as the troop casualty count surpasses the 3500 mark the emotional impact on this country as well as the economic impact cannot be overlooked.

Increasing Consumer Credit

According to a May, 2007 Federal Reserve report, U.S. consumer credit increased much more than the expected $13.46 billion in March as Americans loaded up on credit card debt, closed-end loans for cars, vacations, and education.  If there is a recession, the inability to pay down this increasing debt will magnify the negative effects of a recession.

Declining Auto and Retail Markets

The slumping housing market, increased consumer debt, and gas prices surpassing $3 per gallon have had a negative impact on the auto industry.   Both Ford and General Motors have reported decreasing sales from April of last year. Ford experienced a decrease of 12.9% and General Motors 9.5%.

The same factors have kept many consumers away from stores during the month of April as Wal-Mart Stores Inc., J.C. Penney Co., and Federated Department Stores Inc. all reported slower sales from April of last year.

While it appears that all factors point towards a dismal future for the U.S. economy, there are however a few positive signs within the market that may point to a brighter future for the U.S.

1.    After Enron and WorldCom scandal corporate balance sheets are stronger.  Companies have cleaned up their financial statements and have employed more conservative reporting strategies.
2.    Increased focus on the war in Iraq has spurred debate and increased pressure on the government to produce a more tangible plan of execution.  Dick Cheney’s visit to Iraq was seen by many as a signal to the Iraq government to provide a more active role in solving their own problems thereby possibly indicating a shift in thought by the Bush administration as it pertains to withdrawing US troops.
3.    Global prosperity has continued as countries such as Vietnam, Brazil, Japan, and Germany have all reported expanding gross domestic products.  This increase in global prosperity coupled with the still weak US dollar could increase US investment and export revenue.
4.    According the jobs data released by the Bureau of Labor on June 1st, 2007, wages increased by 3.8% over the past year.  When factoring in an increase in the Consumer Price Index of 2.6% over the past year, we see an actual increase in “real” wages of 1.2% over the past year.

Whether economic circumstances are positive or negative, as individuals we still maintain the capability to control of our own economic future.  Acquiring adequate insurance coverage for our families, practicing responsible usage of consumer debt, maintaining increased savings for a “rainy day”, and investing within our communities are all strategies that will enable us to take control of our financial futures.

In addition, the merits of education cannot be overlooked.  Recent data released by the Bureau of Labor on June 1st, 2007 jobs data report reflects a direct correlation between unemployment and education.
Educational Level    Unemployment
Rate    National
Unemployment
Average
Bachelor’s Degree    2.0%    4.5%
Some College Education    3.4%    4.5%
High School Education    4.5%    4.5%
Less Than High School Education    6.7%    4.5%

As noted above, one can see that as education increases, the rate for unemployment decreases.  According to a report from the Commerce Department’s Census Bureau, a college master’s degree is worth $1.3 million more in lifetime earnings than a high school diploma.  Below are statistics taken from the report titled “The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings” from the Commerce Department’s Census Bureau.  (Stats come from “The Big Payoff”, by Jennifer Cheeseman Day and Eric C. Newburger, US Census Bureau, Issued July 2002.)

Educational Level    Work-Life Earnings Estimates
High School Degree    $1.2 Million
Bachelor’s Degree    $2.1 Million
Master’s Degree    $2.5 Million
Doctoral Degree    $3.4 Million
Professional Degree    $4.4 Million

Despite the fact that many of life’s circumstances are unpredictable, we can predict that there will be some volatile situations we will all confront during our life time.  More importantly, while we cannot predict the economy, we can educate ourselves so as to prepare ourselves for these volatile times.

In addition to educating ourselves about the best financial strategies for our own individual circumstances, we can advocate in favor of the pursuit of formal higher education for ourselves and families.

•    How would you survive financially if your employer gave you a lay-off notice today?
•    What would happen to your family and loved ones if you unexpectedly passed away tomorrow or if you became disabled and were not able to work?
•    Are you preparing for the increased costs of college for your children?
•    How much will you have to “down-size” your life style when you and/or your spouse retire?

The bottom line question is “Will you have the formal and the financial education required to respond to an ever-changing economy or will you become a victim of the economy?”  The answer is obvious and the critical key is education.

Written By: Ryan Mack, President of Optimum Capital Management, LLC
For questions call 718-623-3423 or email info@optimum-capital.com