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Unless job growth stalls, however, I don't think we're headed for a recession. As of November, the economy was producing jobs at an average rate of 100,000 a month. Unemployment stood at just 4.7%. Those aren't the numbers you'd see in a recession.
And neither are the numbers produced by the economists' survey. They're calling for a decline in the rate at which the economy creates jobs in 2008 to about 84,000 jobs a month and a rise in unemployment to 5% in June and 5.1% in December. That's a slowdown but certainly not a recession.
And as long as the economy keeps creating jobs, the number of foreclosures on home mortgages and defaults on other consumer loans will remain a steady stream of pain for those caught in the housing bubble but won't turn into a tidal wave that could cripple the general economy.
- Talk back: Do you expect a recession in 2008?
What gives me any confidence that these projections from the economists are near the mark? The weak U.S. dollar and its effect on U.S. exports.
As the U.S. dollar got cheaper in 2007, U.S. goods got cheaper for overseas customers, and they bought more. The $142 billion in U.S. exports in October -- the eighth consecutive month that exports have hit a record high -- ripples out through the economy in the form of orders from domestic suppliers, wages, raw materials and the sale of goods and services to exporters. As of October, U.S. exports were up 14% year over year. That's a big hunk of growth for an economy that's short on good news.
What you could do now
So how do you position your portfolio and your financial life in general for a slower-growing but not-quite-recessionary economy?- Count on the stock market, in general, to struggle. An economic slowdown is not fully priced into the market. Wall Street analysts are still calling for a 10% increase in reported earnings per share for the stocks in the Standard & Poor's 500 Index ($INX) for the first quarter of 2008, for example. As that forecast gets trimmed and investors react to those trims by deciding to pay less for shares, the market will probably trend lower. If the economic slump is as short-lived as economists now expect, the stock market would show a bottom sometime around mid-2008.
- But not every stock will struggle. Gold and natural-resource stocks are likely to climb as inflation fears build and the dollar sinks. Oil prices won't soar -- fears of lower demand from a U.S. slowdown will work to depress them -- but a sinking dollar and the shallowness of the slump will keep oil prices above $80 a barrel. And that could turn oil stocks into winners again in 2008. With many analysts calling for oil to hit $70 or even lower, that could produce some nice surprises for oil stocks come earnings season.
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- Export-driven stocks will outperform. Big multinationals will show stronger-than-expected earnings as stronger overseas earnings are translated back into weaker dollars. Small U.S. exporters will see stronger sales and market-share gains overseas as a cheaper dollar makes their products more attractive to strong-currency buyers. (See my Dec. 7 column, "5 stocks to profit from a weak dollar.")
- Interest rates will continue to fall in 2008 as the economy grows slowly. The economists in the Wall Street Journal survey predicted a 3.8% yield on the 10-year Treasury note by June. The 10-year Treasury yield was just a shade below 4% on Wednesday. A continued drop in rates would be good news for utility stocks and other dividend-paying equities.
- Beyond your portfolio, the first six months of 2008 are shaping up as a good time to hold cash, as long as you've got it parked in something paying a decent yield and liquid enough so you can get at the dough in mid-2008. A slowing economy produces bargains in the financial markets, in real estate and in big-ticket items in general that you'd like to be in a position to jump at.
- And get your ducks in a row so that if rates drop and bad times linger in the home-mortgage and consumer-credit sectors, you'll be in a position to snap up one of those lower-rate deals that hungry brokers and credit card companies will offer. Strike at the bottom of the credit-cost cycle so that you can go into any recovery paying the least you can for credit.
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Jubak’s Journal: Pain ahead in 2008The markets may prefer slow growth, but in the real economy it means a drop in the number of jobs created each month and a rise in unemployment. So although the next year may not bring an actual recession, it won’t be much fun either, says MSN Money's Jim Jubak.
And what if the economists and yours truly are wrong and we do slip into recession? Well, my advice to invest in utilities, gold, natural resources and export-driven multinationals would still look pretty good.
And it won't have hurt to put aside some extra cash so that you'll be comfortable no matter what the economy and financial markets decide to do in the first half of 2008.
Continued: Updates and developments
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