Beyond Recovery

I stopped. Recovery?

The analyst du jour on the Nightly Business Report had just said something about the economic recovery. Given that the financial crisis happened in 2009, the word seemed inappropriate. If the economy is still recovering, perhaps I’m still recovering from the cold I caught two years ago.

In the analyst’s defense, he wasn’t incorrect. He was imprecise.

The first graph that I came across when I researched the economic cycle showed two states: recession and recovery. According to this graph’s creator, the economy had four possible conditions: at a high point (peak), coming down from a high point (recession), at a low point (trough), or moving up from a low point (recovery).

The day after the trough and the day before the peak are all part of the recovery. Such a broad range makes the term nearly useless to firms and households that are making decisions.

Words matter. You feel differently about sharing a space with someone with a sniffle than with someone who is sick. A person might take offense at being called fat, but accept the term chubby. The words describe the same thing, but convey different degrees of severity.

So it is with the economy. Yes, we're in a period of growth, but it's nothing like the period after the financial crisis. I worked in consumer lending at Wells Fargo then and I vividly remember the fear that prevailed. Recovery aptly describes the years that followed as the economy sought stable ground to stand on.

That was over eight years ago.

Today things are very different. The stock market is booming (S&P hit a record of 2503.87 yesterday) and the economy is at or near full employment (4.3%-4.4% over the last five months). Recovery isn’t the word for this.

The word is prosperity.

I wrote this article because I believe it’s important to adjust our mindsets from recovery to prosperity. You need to make different choices when you’re emerging from a recession than you do when you’re approaching another one.

I don’t say this to induce panic. I’m not Chicken Little. I don’t believe recession is imminent.

I do believe that we should prepare today for the eventuality of a recession, which is a reality of the economic cycle, because we’re likely to encounter one in the coming eight years (which is how long it’s been since our last recession).

Preparation can take many forms. Households can save a little more. Firms can retain a bit more of their earnings. There are many non-drastic ways to plan and prepare.

Recognizing that we’re in a state of prosperity is a helpful start.