A recession is defined as two consecutive quarters in which gross domestic product (GDP) growth is negative. During the first part of 2008, U.S. economic growth has been weak, though it has not slipped into negative territory, so technically the country is not in recession. Still, the lasting effects of a downward-sloping economy surely impact the nonessential spending of most Americans. And a change in consumer spending habits, which makes up nearly three-quarters of the nation’s expenditures, will have a rippling effect on the economy.

What are some effects of the downturn on the consumer and what can be done to combat them?

Unemployment
A weak economy naturally impacts the unemployment rate. Firms in all industry sectors have been trimming staff and reducing spending, and many businesses are looking to cut costs and put more expendable revenue aside in anticipation of harder times to come. Because the job market is tight, those looking to attain a job during this period of economic instability may have to temporarily lower salary expectations.

The housing slump
Adjustable-rate mortgages and an increase in defaults on loan payments for subprime mortgages were precursors to the 2008 economic situation. The unethical business practice of some lenders to target customers who chose to live beyond their financial means led to a rise in home foreclosures. The end result has been the diminished value of homes nationwide and lender reluctance to issue loans—even to prospective borrowers who meet stringent mortgage qualifications.

That can be daunting news for people looking to sell their homes. On the other hand, if you are looking to buy a home and can find a lender, you can take some solace in knowing that the purchase price for a new home has become more reasonable. And if you have owned your home for several years, you have likely locked in some gains that you could realize if you can sell. If that is not the case, it may make sense to remain in your existing home until pricing in your area rebounds. Although none of us has a crystal ball, it’s unlikely that a long-term housing price decline will become the norm.

Oil and commodities
The combination of a perceived diminishing oil supply and speculation about the price of oil and its availability has boosted its price to unprecedented highs. This, in turn, has led to a rise in the production and shipment of everyday necessities, which has translated into steep increases in the cost of everything from bread to dry cleaning to clothing. The resulting rise in the inflation rate, coupled with the weak U.S. dollar, has spurred concerns that oil prices will continue to go up.

Creating a budget based on rising prices may make sense for many consumers. A realistic accounting of income and expenses often reveals areas where savings can be attained. Although it’s never fun to cut lifestyle indulgences, it may be the right way to go to weather current economic conditions. One cut that no consumer should make, however, is his or her contributions to saving and investing (whether for retirement or for other goals). A financial professional can help you figure out how and where to make the appropriate changes to your budget.

End in sight?
Fed Chairman Ben Bernanke recently commented that the decrease in oil prices is encouraging as it may signal that inflationary pressures are on the wane, but he is not offering predictions on when an economic turnaround may take place¹. Many economists have different opinions—for example, some believe the reduction in interest rates will foster an inflationary environment.

In any case, we’ve experienced similar events in years gone by—and we’ve recovered to tell the tale. It is important to keep in mind that economic cycles always have periods of growth and decline; so far, in the long term, growth has always reoccurred. Stay positive, watch your spending, and contact your financial advisor if you have concerns about your economic future.

Source:
1. Isadore, Chris, “Bernake: Financial Storm Not Yet Over” August 22, 2008, http://money.cnn.com/2008/08/22/news/economy/bernanke/index.htm