While there is bound to be another recession at some point, the good news is that advisors should have at least a short time to help clients position themselves to mitigate the hit.
There will be no recession in the next 6 months, predicts Polina Vlasenko, senior research fellow at the American Institute for Economic Research, at the Women Advisors Forum. After that its anyones guess.
According to Vlasenko, modern recessions are typically structural, unlike the simple recessions of the past. The economy usually just needs time to stabilize after a simple recession, but a structural recession, such as a bubble burst, necessitates a counteraction to regain stability.
One of the most notable findings by Vlasenko is that the job loss created by modern structural recessions are much different that the simple recessions of the past. During a structural recession it is more likely that layoffs will remain permanent. Following a simple recession, the economy tends to go back to the way it was prior to the crash, which results in the rehiring of the jobs lost.
Using the 2008 recession as an example, Vlasenko said that despite output being able to even out in June 2009, employment did not return as quickly. Jobs did not start growing until 2010, almost nine months later, she said. There is usually a lag but not this much of a lag.
While she expects that the next half-year would be recession free, she made no promises after that. It is virtually impossible to tell in the next two years if there will be a recession, she said. If someone tells you that, dont listen, theyre lying to you.
So with a recession on the indeterminate medium-to-long-term horizon, Vlasenko outlined four ways that advisors can help clients when the next one hits.
1) Dont look back. Due to globalization and recent policy changes, recessions today are unlike those of the past. You cant expect things to be like they were before, she said. Trends seen prior to 1990 may no longer apply due to income growth trends. Manufacturing jobs that have been permanently lost provide one example. This means that advisors cannot expect to gain knowledge of how to aid a client through a recession simply by looking backwards.
2) Be ready to adapt. Recessions bring about changes, Vlasenko said, who cautions advisors to have their clients prepare for more than just monetary issues. Using permanent job loss again as an example, she says that people need to have a plan in case the worst-case scenario actually happens.
3) Saving is key. Until the end of the 1970s the average time for unemployment was 15 weeks. Today, however, that average has increased to 35 weeks, according to Vlasenko. Longer periods of unemployment are likely, she said. In addition she warns advisors that the average unemployment benefit period is 26 weeks. People need to plan for at least six months, she said. But I would plan for more than that.
4) Stay informed. During her presentation, Vlasenko mentioned that many people had said that the housing bubble in 2008 took everyone by surprise. However, she then provided the audience with an article written in 2007 stating that the housing market was in jeopardy of crashing. The only way to prepare for change is to stay informed, she said. Changes will happen and you will have to find out what they are as you go along.
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