Is America Recession-Proof?
Americans are not unfamiliar with making history. Recently, we left a footnote in American history for continuing to endure the longest government shutdown in our history. We are also coming up on the longest period of time between recessions in American history, only in close second to the decade between the early 90s and 2000s that saw the burst of the dotcom bubble. Today, we're at almost ten years since the last recession, and counting!
Don't celebrate yet! What has become painfully obvious, as these two seemingly unrelated events occur in tandem, is that Americans are not prepared for the next recession. The government shutdown has shined a light on just how stretched the American dollar is for most average households. The revelation that millions of Americans are financially vulnerable, comes at a point when many economists say we are on borrowed time. Here's a look at the global economy, and what a recession means for America.
The Interconnected World of Money
When asking, "Is America recession-proof?" it's important to take a minute to zoom out and look at our role in the tapestry of a global economic framework. Brexit, and a rise in populism in Western countries, has been perceived as a global threat to society. However, great minds in economics and capitalism suggest the biggest threat we face, internationally, is the proximity of the next recession. It's coming, and in case you hadn't guessed, we aren't recession-proof, not entirely, at least.
The most simple explanation has world leaders looking to Europe, as the United Kingdom navigates Brexit obligations. The most important and prominent trade partner of the UK, Germany, has been experiencing lower than projected economic growth under the weight of global issues. This is significant because Germany is regarded as the most prosperous economy in Europe, and has been for some time.
As Germany's numbers suggest it's staggering toward recession, all nations must proceed with caution, gearing up for what's sure to follow when a nation's economy, and significant global trade partner, hits a financial roadblock. The global economy is an interconnected one where no nation exists in a vacuum, and none is immune from recession. Today, all eyes are on Germany. Should America fall into a recession, the impact on the global economy could be devastating in this unique period of world history and political tension.
What to Expect
What to expect from a recession is tricky. There are several things happening currently that could potentially destabilize America's economy should we be pulled toward the next recession via international forces. These include:
- Trade tariffs and new trade policy
- Fluctuating oil prices
- Military conflict
- Rising inflation and interest rates
- Typical decline of the currently high housing market
- Weather and natural disasters; and
- The overall strength of American currency
As more and more countries begin to embrace the reality of recession, within the next year or two, any one of these volatile market indicators, or something yet unanticipated, could cause our economy to tip into recession. Investors who have not begun to recession-proof their portfolios should consider doing so. Intelligent Investing contributor to Forbes magazine, John E. Girouard, suggests dividing your portfolio into 5 robust buckets:
Bucket A: Do the math to figure out what you need to survive for five years, then move those funds from portfolio bucket A to "a layered CD or bond portfolio, or even fixed annuity to make sure that you always have your near-term cash flow secured."
Bucket B: This portfolio should be nurtured for 3% growth over five years. This will be the portfolio bucket you tap into in the event a recession comes and you run out of money from portfolio A before the end of the recession.
Bucket C: The first two portfolios should contain your living expenses for up to 10 years, so bucket C is a continued contingency. Because it's not as likely you'll be tapping this fund soon, it can assume more risk. Consider investing "more in equities, and in good years when you exceed 4% growth, you can use your excess to make up for possible inflationary increases in your lifestyle."
Bucket D: If you're following this logic, portfolio D should be one poised to meet maturity in 15 years. In this bucket, you can assume the most risk and feel relatively confident that the economy will recover before you'd need to access these funds.
Bucket E: Consider this portfolio as sort of a slush fund. Each year, you can move excess funds into portfolio bucket E, and convert them to liquid cash assets, annually, or when the timing is right.
If you're one of almost 80% of Americans living paycheck to paycheck, you might think a diverse portfolio like this a pipe dream, but it's still possible for the average American.
When it comes down to it, America is not recession-proof, not by a long shot. However, there are some cities in America whose local economies are better insulated against the impact of global industry failures and domestic vulnerabilities. According to Realtor.com, the best cities in America for buffering the effects of a recession are as follows:
- Lincoln, NE
- Witchita, KS
- Fargo, ND
- Victoria, TX
- Knoxville, TN
- Tulsa, OK
- Des Moines, IA
In most cases, these cities offer greater financial stability in the form of a self-sustaining economy based on an industry or industries that are effectively "recession-proof", like education or agriculture.
If you can't find work in one of these cities, or adjust your portfolio accordingly to provide 15 years of safety net income, you're probably like a lot of Americans who feel helpless to control your circumstances. That said, if housing economists are to be believed, the recession many had projected to occur by 2020, may not happen until 2021, giving everyone an extra year to get things in order.
Don't wait. It's only a matter of time before we experience our next economic downturn, and average families should be tightening their purse strings to prepare. Whether that means leveling up in your current career path to have a little extra money for savings, refinancing debt, or tweaking your existing investment portfolio is up to you, but not having a plan is not ideal. So buckle in, it's going to be a bumpy ride.