There has been lots of talk in the media recently about a recession in the US.  So that is the topic for today.  First, so that we are all clear on what a recession means:  In the US, a economic recession is a period of time in which GDP (gross domestic product) declines for two consecutive quarters.  (Source: http://www.moneychimp.com/glossary/recession.htm).

So, it means that the economy is still growing, not just as fast as it was the previous quarter.    Now, why is everyone worried about it?  And let me start off by saying that recessions are not bad (this is of course the opinion of pencilclamps), but let me also say that there are some disadvantages of recessions.  I think it is important for everyone reading to grasp the idea of “average”.  Average is the middle point between Perfect (100 % – A +) and the opposite of perfect, lets call it “flawed” (0% – F).  Now, here is the key, not many people shoot for average, but logically, we know that not everyone can be above average.

To illustrate the idea of averge, imagine that you are playing miniature golf, and further imagine that you are playing with 1,000 of your friends.  You are an above average player of miniature golf, but there are others who have not played before, so we will assume that on the whole, your group is average.  Now, to further the illustration, you and your friends play miniature golf every week, and have been playing for 80 years (you don’t feel a day older than you started as long as we are imagining).  And finally, you have been keeping score all the while, so have the benefit of history to see all the scores.  The average score is 18 * 3 = 54.  Your group has come a long way, in fact, when you started (the first 10 years), the average scores were 70, as a lot of people were still figuring it out, and now (the last 10 years), the average score is 45.  You are also able to tell that as a percent of improvement (growth), that on average you improve by 3.5 strokes every 10 years.  This is your average growth, and you are NOT disappointed, as you are growing and happy to have improvement.

Now, lets say that over the last two years, (maybe the weather has been good or there are conditions that have been favorable for playing), that your average has improved by 5 strokes (more than the improvement that you would expect for 10 years.).  You are overjoyed, and excited about the progress.  You think to yourself, “man, we are going to do great this 10 year period (we’ll probably improve by 12 or 13 strokes) , in fact, its probable that after all these years, we have figured it out, and the averages of the past are not applicable.”

By doing this, you are forgetting that there were periods before of more growth and periods with less growth.  And this is where the recession comes in.  We have been experienceing lots of growth (especially in the housing market), and a recession, is simply a correction so that growth is more in line with the average, and unfortunately that means that instead of growing a lot, we only grow by a little.  It means that people have less money to spend because they are making less, but it is normal (It is part of a normal economic cycle).  So, your response is to keep that perspective in mind as you make your decisions and listen to the media, and that in the long run the economy will continue to grow by the average, and we shouldn’t worry much about the short term.

pencilclamps