We’re going to discuss something hopeful today, along with some stuff you can actually control right now.
First, the hopeful part—
This recession should be short and swift. I am not saying that because I’m some pie in the sky optimist... because I’m not one.
I’m saying it because there’s good research to back it up.
See, economists build all kinds of models to study recessions. However, there are things they cannot model for—like natural disasters, terrorist attacks, and pandemics, including the coronavirus pandemic we’re experiencing now.
Economists call these things exogenous events.
Normally, recessions are triggered by imbalances in the economy. This happened with housing in 2007, technology in 2001, and commercial real estate in 1990. So normally, the length of a recession depends on how long it takes to correct the imbalance.
The current slowdown is different. It wasn’t triggered by an imbalance in the economy. It was triggered by a pandemic—an exogenous event that literally came out of the blue.
So here’s the good news: Recessions triggered by exogenous events tend to be short and swift. The decline happens faster, but so does the recovery.
There are a couple of good examples of this: the Spanish flu of 1918–1919, and the Asian flu of 1957–1958. Both of these episodes sparked short recessions lasting 7 and 8 months, respectively. The economy declined sharply, then rapidly rebounded as the disease subsided.
Both episodes also saw short, swift declines in stock prices, followed by rapid gains as the disease subsided.
Now, you may have heard that we’re not “officially” in a recession yet. The textbook definition is two consecutive quarters of economic decline. That means US gross domestic product, or GDP, has to go down for two quarters in a row.
But I don’t have to tell you that we’re there. What’s happening now is definitely a recession. And it might be severe, but it should also be short and swift. Then things should return to normal pretty quickly, meaning 7–8 months or so.
Yes, there’s always the possibility that the coronavirus will be different. But if history is any guide, we’re looking at 7–8 months.
For some of you, that may seem like a lifetime. Most of the country is under some form of shelter in place. Everyone is worried about Grandma. And many of you have been furloughed from your jobs.
I don’t want to downplay any of that. The personal and financial pain many of you are experiencing is very, very real.
And sure, you can write your congressional representative or sound off on Twitter. But you’re not in charge of the medical response to the coronavirus, and you’re not in charge of economic policy. A lot of this stuff is completely out of your control.
So, what should you do while this recession plays out?
Focus on the things you can control—
If you are still working and haven’t set up your emergency fund yet, do it now. (I showed you how last week.)
Unless it’s literally a matter of life or death, do not use your retirement accounts to cover this or any other emergency.
Sounds obvious, but don’t spend a bunch of money on stuff you don’t need, even if you are still working. I don’t harp on people’s latte habits, but if you’re bored at home, this is not the time to buy jet skis off the internet. Find a different hobby.
Write down the things you are grateful for. This is not a hokey, kumbaya exercise, especially in the middle of a crisis. Don’t worry about what the guy next door has—everyone’s gratitude list will look different. Focus on what you’ve got.
If you’ve been furloughed or laid off, stay in touch with your old boss and co-workers. When it’s time to rehire, you want to be at the front of their minds.
It’s easy to lose perspective in these circumstances, but this is NOT going to last forever. Eventually, the economy will bounce back. I can’t give you an exact date—no one can—but it will happen.
In the meantime, focus on what you can control, stay home, and wash your hands.