SUSAN TOMPOR: Spend, save, but also plan to survive the tumble November 1, 2001
BY SUSAN TOMPOR FREE PRESS COLUMNIST Everybody from the congressional leaders to the advertising team at General Motors Corp. is urging us to go shopping to get the economy hopping. And that's OK if you want to keep life as normal as possible after the terrorist attacks. But we're looking at the likelihood of the first recession since 1990-91. The economy contracted 0.4 percent July through September. And some economists say it could fall as much as 3 percent in the fourth quarter. Then, a recession would be a done deal. Shop? There are bargains. But do you want to pull out your wallet if you could lose a paycheck? "Leaders have said 'Go out and spend, be patriotic.' That's fine if you have money," said Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis. Economic times are iffy. People need to adjust. Some strategies: Go to the mattresses -- and stuff those cash cushions. It might sound un-American, but it is sensible to save money. After all, the jobless rate will probably get worse. Ellen Hughes-Cromwick, senior economist for Ford Motor Co., said the U.S. jobless rate could peak somewhere between 6 percent and 6.5 percent in the next three to six months. That would be quite a leap from a U.S. rate of 4.9 percent in September. Many economists -- including Hughes-Cromwick -- remain hopeful that the economy will be back on its feet next year. But it could be tough to find another job. Make sure you can cover the rent or the mortgage for a few months, in case you are laid off. Refinance your mortgage. Now is a good time to take advantage of lower rates. You could cut your monthly mortgage payments. If you have enough equity in your home, you might take some cash out of the house and build up an emergency reserve or pay down other bills. Most economists do not expect mortgage rates to drop much further. If anything, some say, mortgage rates could climb. Douglas Duncan, chief economist for the Mortgage Bankers Association in Washington, D.C., said the average fixed rate for a 30-year mortgage could climb to 6.6 percent in the fourth quarter from 6.5 percent now. Duncan said mortgage rates would then continue to rise in 2002. By the second half of next year, the fixed rate for a 30-year mortgage could be 7.2 percent. Rates would increase for two reasons. First, the economy could recover next year. Second, Duncan and some other economists fear that the bond market could become increasingly worried about inflation, particularly if Congress creates too many temporary spending programs to boost economic growth. Instead, Duncan favors speeding up tax cuts that would have taken place in later years. Duncan is refinancing his own mortgage now. He is moving from a 30-year mortgage with a rate of 7.25 percent to a 15-year mortgage with a fixed rate of 6 percent. His monthly payment will be the same. But he will be free of mortgage payments entirely in 15 years. His family plans to continue living in the house for many years. If someone plans to move in two years or so, Duncan said it could make sense to refinance to an adjustable rate mortgage. The average rate for a one-year ARM is 5.1 percent. Ignore any impulse to dump all your stocks for bonds. Yes, the stock market is likely to continue to be volatile as traders try to judge just how long this economic downturn could last. But the time to buy bonds is before interest rates fall, not after they've tumbled. Loading up on bonds now would be a "very bad idea," said David Littmann, chief economist for Comerica Bank in Detroit. Since Jan. 3, the Federal Reserve has cut short-term interest rates nine times. And Littmann and other economists don't see much more room for further cuts. So bonds, which did well during the past year, could do poorly next year. "Bonds and inflation are like oil and water. They just don't like one another," said Robert Bilkie, president of Sigma Investment Counselors in Southfield. Bilkie favors investment-grade corporate bond funds over government bond funds. He said corporate bonds could post better returns once the economy resumes growing. Don't hunker and hoard. The next six months will be challenging. But many economists say the economy is set for a rebound in 2002 -- especially if no other unexpected shocks take place. "Stick to a long-term plan if you want good long-term results," advises Carl Tannenbaum, chief economist for Standard Federal Bank in Chicago. Keep buying stocks. Keep saving money in certificates of deposit. Keep shopping. Do not give up on the American way of life. "I'm not saying go splurge on a Las Vegas vacation. But go out to eat, shop for holiday gifts as you would," Tannenbaum said. The sooner we get back to normal, as best we can, the sooner the economy can work its way out of its slump.
