Recession Definition
None of us has been living in a cave for the past few months, so we all know that the economic crisis in the US is in full swing. Most of us also know, believe, respect the opinion of economists, or at minimum, recognize that history repeats with respect to most things; the translation advises us that we are about to be affected by the economic crisis faced by the US and a recession is either already occuring or imminent.
What exactly is a recession? According to economic definitions, a recession is a downturn in the business cycle that occurs when the real gross national product (GNP)—the total output of goods and services produced population declines for two consecutive quarters, (1/4 year = 3 months, so 2 consecutive quarters is six months). Recessions are usually characterized by a general decrease in output, income, employment, and trade lasting from six months to a year. A more severe and long-lasting economic crisis is known as a depression. Mostly because we are living in North America, our government somewhat protects us from dropping into an economic depression, which hasn't happened for decades - mostly due to government interventions and strategies.
Recession History
A quick review of the history of the recession indicators from the turn of century start with a 1907 drop in the Dow Jones Industrial Average to the tune of 35% over a period of nine months! If we remember anything from high school history, we know about the Stock Market Crash of 1929, when stock markets dipped 85% over three years, but made a dramatic drop over a few short months and for the first time affected global markets. Then there was the 10 month recession in 1960-61. Then the Iranian Revolution and the associated oil crisis and energy crisis of 1969-1970. Some of us might remember the oil stock crash of 1973, when the evening news showed us line ups for gasoline in the US, oil prices quadrupling (due to OPEC changes) and heavy financial losses from Vietnam, with economists and financial analysts described the 40% drop in the two year period post 1973. In the early 1980s, there was the recession of 1982 and 1983, caused by tight monetary policy in the US to control inflation and sharp correction to overproduction of the previous decade, which effectively was masked by inflation. The national exuberance of the 80s (real estate in Canada as well as the S & L (Savings & Loan) exuberance) period probably led to the recession of the late 1980s. Most of us can't help but forget the 'Black Monday' of October 8th 1987, when stocks abruptly fell in one morning, but continued to fall over three weeks to an almost 82 points. Then, spurred on by the tech stocks, the collapse of junnk bonds and a credit crunch, as well as the internet revolution, there was the serious 1990 recession that lasted from July 1990 through to March of 1991, but had after effects for some time after that; fortunately, government spending and other initiatives helped to stall the advent of an actual depression, although interest rates for residential mortgages climbed dramatically during this period. The next recession began in March of 2001 and ended in November, with after effects until 2003 with the collapse of the Dot com Bubble. Of course, we all remember the minor correction/contraction caused by the September 11th attacks and the accounting scandals. However, since about 2002-2003, there has been no recession, with the economy in an upward swing that seemed everlasting - until now.
Update - July 2008
Another war and another credit crunch brings us to 2008. Here we are, with a brooding economy south of the border (should we have known when our dollar crept up for the first time in three decades?). As the real estate bubble continued to gain momentum, and more and more people were encouraged by the social morals of this day and age (purchase on credit and worry later - laden with debt) affected the judgement of the mortgage industry, and we continued to buy, buy, buy, and spend, spend, spend, we should have known it would end. And now, it has.
What are we to do? That's the million dollar question. If you're in real estate, you might now be reducing your risk and playing the RichDad "Where can I really find hard core cash flow properties?" routine....whatever your choice, you've surely reviewed your goals and modified your real estate decisions over the last six months, to accommodate for the changing financial arenas.
Update - March 2009
Well, here we are: in a full out recession, which people are likening to the Great Depression of the Dirty Thirties! With AIG needing a further bailout, with auto companies failing, and European banks at the brink of disaster, what are we to do? I continue to say that this is likely one of the best times to buy we've seen in the last couple decades. You could argue that we should wait a few more months to a year to make sure that we've hit the low, but regardless, moving forward, we should look at the situation as a situation of hope! Why? Because this is the type of situation they are talking about when they say "Buy Low, Sell High." Don't run for cover or let the media and the economic uncertainty rule your decision making. Break free!
