Does the state of the economy scare you?

Question

My grandfather has been predicting a stock crash for awhile now by telling me how things went about in the '20's and pointing out the simmilarities to whats happening now before they happen. Are we headed for another depression since people so easily forget history?

Answer 1

Yes.

Answer 2

Although the market might go down, a recession might not happen.

1. The U.S. makes very few products and manufacturing is what gets hit the hardest during a recession.
2. The new growth, mostly in the housing sector, was done by foreign workers.
3. There are still sectors hungry for jobs including education, health care, railroads, law enforcement and the military.
4. There is an aging workforce, meaning people will retire at a faster or nearly as fast as any job loss. So if 80,000 people retired and 80,000 jobs were lost during the same period it will tend to even out.

Answer 3

Depression -- No

Recession -- Yes.

A study by Campbell Harvey in the 1980s shows that whenever the yield curve inverts (three month interest rates higher than five year interest rates) a recession follows four or five quarters later. This indicator has been perfect -- both before and after his study.

The yield curve was inverted for most of 2006. If history is a good predictor of these things, we are on our way.