What Is a Recession and How to Help!

The “R” word is emerging daily as market volatility continues in response to the global trade war initiated by the U.S.  How do you explain this to clients and guide them through this period of instability and uncertainty?  Here are some thoughts:

1. The Definition of a Recession.  A recession is defined by a fall in Gross Domestic Product (GDP) for two consecutive quarters.  It is typically described as a temporary period of economic decline in which economic activity is reduced is followed in a relative short term by a resumption of economic activity and an increase in GDP. 
2. What is a Depression?  A depression is a severe recession in which there is a longer term global economic decline, often described as 10% or more in economic activity.  The Great Depression was the longest period of economic depression in modern history,  lasting 10 years from 1929 to 1939.

What can be expected during periods of economic decline – temporary or more permanent in nature?   Expect a decrease in consumer spending, a resulting decrease in the production of goods and services, and that can lead to unemployment, business failures and the difficulties that this entails:   inability to pay credit cards, mortgages, operating lines, etc.  In short, a spiral of financial issues that negatively affect the solvency of individuals and businesses in your home town.

How can advisors help?  Have proactive conversations that take a hard look at the financial position of both the individual and any small business they may own.  Under a Real Wealth Management framework, that involves the detailed analysis of income and capital on three important documents:

1. The Net Worth Statement for individuals in the family
2. The Tax Returns (going back at least three years to manage loss carry backs)
3. The Financial Plans (to review short term and longer term objectives)

The Bottom Line – Using a proactive, analytical approach, taxpayers and their advisors can lean into the difficulties to come – temporary or permanent – and be stronger for it because they have more choices.