Thursday, March 20, 2008

If You Don’t Like The Economy, Just Wait 15 Minutes

Author: Nick
Category: Money

3 - economic news overload

Guess what, everyone? The economy is recovering! Oil is down, the dollar is up, and once-dead stocks are set to come back to life. So start buying houses again, bring your money invested overseas back home, and throw caution to the wind.

Wait wait wait! This just in. The economy is shot to hell again. Stock prices are plummeting, inflation is skyrocketing, and the price of a slice of pizza is soaring. Walk away from your mortgage, trade in your car for a bicycle, and stash your cash under your mattress.

No wait, I take that back…

Depending on where and when you get your financial news, you may get a completely optimistic viewpoint that promises the economy is on the path to recovery—even though it hasn’t officially entered recession or depression or any other unhappy words. But 15 minutes later, that optimism turns to despair and hopelessness as some company somewhere lowers its profit forecast by 3% and takes out half the U.S. economy in the process.

Trying to read the pulse of the economy has gotten a lot harder lately. That’s because, in this age of instant news transmission and media sensationalism, the health of the economy has changed from a day-by-day vital sign to one that is switching directions every few seconds. Just look at this graph of the Dow Jones Industrial Average for the last 38 years. Gone is the relatively flat line of the 1970s and 1980s. In its place is something that looks like a roller coaster built by a crack fiend.

For the typical American consumer, hearing about things like “rampant inflation” and “looming recession” can be very scary, especially if you know what those things actually mean for you. But you shouldn’t worry too much about 99% of the everyday economic news you hear. Here’s a quick guide to scary-sounding financial events you shouldn’t panic over personally:

  • [Insert company name] [bad news goes here]. Yeah, some big companies reporting major losses can have an immediate impact on the economy in general. Fortunately there are lots of big companies out there, so the investors driving most of the big financial news lately will get over it in 10 minutes when another company reports record profits.
  • Unemployment is up. All this means is that across every job field in existence in the whole country, there are slightly fewer people working than before. This doesn’t necessarily mean your job is at risk. If you’re in a high-demand field and you’re a hard worker, you don’t really need to worry if Burger King replaces half its drive-thru workers with robots in India.
  • Stocks are falling. Don’t start checking your 401(k) balance compulsively. And even if it sounds like there are more down days than up, the news just gets louder when the stock market takes a hit.
  • The dollar is at record lows. Unless you and your life savings were planning to move to Europe next month, you shouldn’t worry too much about the falling dollar. Yes, things here might get more expensive faster, but you’ve got 300 million other people alongside you in the same predicament, so it’s not like you’re alone in this.
  • Interest rate are [doing whatever]. Whether it’s the Fed rate, your mortgage rate, or your savings account rate, you shouldn’t panic if 6% turns into 4% turns into 3%. If your high-yield savings account rate drops too low for your tastes, it may be time to start playing the stock market a little more which will probably see gains when the cost of borrowing money declines.

And while there are plenty of economic indicators over which you shouldn’t get in a tizzy, there are a few things you’ll want to watch out for that may have a more direct impact on your financial picture.

  • [Insert YOUR company name] [bad news goes here]. Depending on where you work, your company might not be big enough to make broad financial waves, so you may have to look to closer sources for news on the financial health of your employer. If things look bad, start planning appropriately for potential layoffs and other bad news.
  • Your individual investments are heading downhill. If you’re into dropping large amounts of money on the latest “sure thing,” you’ll need to be much more paranoid than people like me whose only risky investments are index funds.
  • Your direct expenses are going up. Yes, you should be a bit concerned when gasoline prices go up (not crude oil prices; you don’t use raw crude oil for anything). But rather than pacing around the room pulling your hair out, you should think about ways to decrease those expenses (cutting back or switching to a cheaper alternative, for instance) to address such changes.
  • McDonald’s Dollar Menu now costs $1.10. If this ever happens, I will dump my life savings into gold and hide out in the mountains for a few years.

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