Surviving the economic storm

By Peter Coy

updated 5:57 p.m. ET Oct. 26, 2008

When conditions are dire and people are losing their nerve, Traxis Partners hedge fund manager Barton Biggs pulls out a chart of the London Stock Market's performance during World War II. The fever line plunges as the German army invades Poland, Denmark, the Netherlands, Belgium, and France. Then an odd thing happens. Just when the mood is darkest — in June 1940, as Adolf Hitler is inspecting conquered Paris — the market finds a bottom and begins a long, steep rebound. It's almost as if investors sense that somehow, some way, Hitler is destined for defeat.

As those doughty Brits demonstrated nearly 70 years ago, fortune favors the bold. As long as you're not overleveraged, scary times like the current recession can present a perfect opportunity to make calculated bets. That's true whether you're a manager, an employee, an investor, a consumer, or a borrower. In this Recession Survival Guide, we'll share some of the smartest ideas we've heard for people in each of those roles. Most of us fit into all of them in one way or another.

With markets gyrating from day to day and the financial system still seeking its footing, no one can be sure what will happen next. Still, we'll try to dope out where the economy and financial markets are headed, and to suggest how BusinessWeek readers can survive and perhaps even thrive in their business and personal lives.

To be sure, it takes either iron self-control or Teflon self-delusion not to develop a bunker mentality in these difficult times. On Oct. 17, to pick just one day of bad news, the Reuters/University of Michigan's survey of consumer confidence posted its biggest one-month decline since it began more than 50 years ago, while the government said single-family housing starts hit a 26-year low. Glumness prevails. Faith Popcorn, the pop trend analyst, says: "If you go up Madison Avenue [in New York], past Fendi and Prada, those stores are empty. Women are shopping in their own closets. You feel shame in buying even if you can buy."

How much worse might things get? Possibly a lot. Nariman Behravesh, Global Insight's chief economist, forecasts a mild recession, but he sees about a one-third chance of something more — a 1.5 percent to 2 percent contraction in U.S. gross domestic product in 2009 as a whole, which would make this recession nearly as bad as the back-to-back downturns of 1980-82, which were the deepest since World War II. And the post-recession recovery could be painfully slow. Even after the mild 2001 dip, it took four years for employment to regain its pre-recession peak.

Credit crunches like the current one (except milder) contributed to all three of the last recessions. In 1980, the Carter Administration tried to cool off the economy with government-imposed credit controls and succeeded all too well, contributing to the sharpest quarterly downturn in real GAP growth in the past 50 years, a nearly 8 percent annualized decline, says  Chase economist Robert Mellman.  predicts the current squeeze will cause GAP to decline at an annual rate of 2 percent this quarter and the next, though the bank expects a healthy recovery in the back half of 2009.

Slowing and tightening
Expect the biggest hit to the sectors that most depend on credit availability, including the already depressed housing and auto markets. Consumer spending will suffer as Americans lose access to lending and attempt to rebuild their savings. Private, nonresidential construction, which remained strong long after the housing market tumbled, is headed for a crash of its own, predicts Global Insight's chief U.S. economist, Nigel Gault.

MORE FROM PERSONAL FINANCE

Personal finance Section Front

It's summertime and the living is stingy, mostly With effort you can still retire well Blacks, Hispanics save less for retirement Answer Desk: Who'll take California IOUs? It’s recession, when thoughts turn to ... dating Jackson death illustrates will vs. trust issue Answer Desk: Slow stimulus spending Helpful finance tips, or sneaky payday loans ad? New program helps manage student loan debt Recession hurts card industry, customers Personal finance Section Front   Add Personal finance headlines to your news reader: