I came across an interesting article on CNN.com discussing the possibility of another recession hitting the United States. Through my curiosity, I began to research and found at least five articles, all stating we may be in a recession between 2019 and 2020. Upon further analysis, all these articles had one common denominator, using the yield curve to predict an up and coming recession. So what is a yield curve, and if a recession is coming what can you do to prepare? Here is the answer.
The yield curve is a comparison between interest rates on short term and long term treasury investments. When the yield curve slopes up, the economy is said to be doing good because the interest rate on long term treasury investments is higher than that of short term investments. When the yield curve flattens out or inverts, the interest rate of short term treasury investments is higher or equal to those of the long term. The reason everyone is worried is because the yield curve is beginning to flatten out and head towards inversion and the FED is scheduled to increase interest rates two more times in the near future; which would keep this flattening and inversion going. This is scary because an inverted or flat yield curve is an economic indicator for a recession. If we try to predict the economy off of the yield curve, it is a likely possibility that a recession is coming, so what should you do to prepare.
To prepare for a recession, you need three things: reduce, save, and network. First you need to minimize your debt and not create new debt. Minimizing your debt can be done in two ways. One way is living your life on a budget and personally making plans to pay your debt. This option is best for those people who have the discipline to make a plan and stick to it. For those people that cannot stick to a budget or do not have the financial capability to pay their debt, they can consider bankruptcy. Individuals can file either a Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is a liquidation of an individuals assets, and the funds from liquidation goes towards your debts. After about 90 days, you receive a discharge and all your debt goes away. Under a Chapter 13, you enter a structured payment plan. Through this plan, you make a monthly payment and after 3 to 5 years in the plan, you receive your discharge and you are debt free. Debt planning or bankruptcy is by far the best ways of clearing your debt outside of winning the lottery. Another key to this first concept is DO NOT CREATE NEW DEBT!!!! Unless it is something that is needed to support your household, do not create new debt. The creation of new debt only adds more stress to your financial situation and creates another bill that must be paid in the future. Once your debt is under control, then you can begin saving.
Second, establish a nice savings account. One of my dear friends and colleagues has an obsession with saving money. Her plan is simple, every pay check that comes into the house, ten percent goes into a savings account. That is a straight forward way to save money, and does not take too much income out of your household. For individuals that are a little more stable, you can look at taking fifteen to twenty five percent from each pay check and placing it in a savings account. Another way to save is to place the money you were spending on old debt in a savings account. This means once something is paid off, take the same monthly payment you were making, and place it in a savings account instead of sending it to the creditor. A savings account should usually be about six months worth of household bills. This way, if a recession does hit, you have enough savings to keep your family afloat for six months.
This brings us to our final step, a job. Unemployment usually rises during a recession. A lot of individuals lose jobs, which leads to debt going into collections and money becoming short. For those individuals that have completed the steps above, you have bought yourself a little time and peace of mind for about six to seven months, but that doesn’t matter if you cannot replace your job. To do this, you must be job ready. Go ahead and update the ole resume and dry clean the interview suit. Start adding new people to your job network and attending new networking functions. Begin making yourself marketable again. During a recession, where everyone is losing jobs, new jobs go to the swift and the better prepared. Have some new job ideas already lined up, just in case the old job lets you go.
In summary, another recession may be coming, but this time we can be ready for it. Start today by clearing debt, saving money, and expanding your network. When that day comes, you will be well prepared and ready to fight through the economic downturn. But if it doesn’t come, then look on the bright side, now you are debt free, with a savings account, and new friends.
The Interest Rate Spread and Annual % Change in Real GDP The diagram relates the interest rate spread (10-year T-bond yield minus Fed funds rate) to the rate of economic growth. Notice how the interest rate spread became negative just before each of the recessions shown in the table, thus serving as an important leading economic indicator. The interest rate spread has correctly forecasted all U.S. recessions since World War II. Note that the interest rate spread again became negative during the last two quarters of 1998, and again in 2000 and the first quarter of While the first of these inversions may have occurred as a consequence of the Asian financial crisis, the latter inversion correctly indicated the recession that began in March While GDP growth is strong, the interest rate spread has been declining since the first quarter of While the Fed has been raising short-term rates to head off inflationary fears, long-term rates have remained relatively low. The latter is due in part to China and other countries with a trade surplus with the US using their dollar holdings to buy US treasury bonds. The Fed doesn’t consider the current inversion in the interest rates spread to be a leading indicator of a coming recession. Not all economists agree though.