“Should I be worried about the economy?”

Most of my friends don’t follow the economy or the markets that closely, so it has been interesting for a number of them to ask me recently, “Should I be worried about the economy?”  The answer isn’t a simple one.

Part of the answer depends on your line of work.  Stuff that’s economically necessary (utilities, staples, government, common services) will probably do okay, though there will be some slackening of demand at the edges.  For example, I visited  a hair salon recently, and asked how business was.  The answer was that customer numbers were unchanged, but that the average purchase level had dropped.  Even government positions, stable as they are will experience some pressure, because budgets have to balance, and tax revenues are starting to sag a bit.

Now if you work in an export-oriented sector, with the dollar down, you will probably do okay.  Demand for food, energy, raw materials, industrial goods, and some technologies will continue relatively strong.

But institutions that rely on credit risk, whether borrowing or lending, will have it tough.  During the boom phase, more and more bodies get added to service the cash flow.  At his point, bodies are coming out of banking, investment banking, real estate, homebuilding, etc.

You can also ask how well capitalized and profitable your current firm is.  This is not a time that rewards high degrees of leverage and short-term financing (unless you are very well capitalized). Volatility rewards firms that have excess capital; it is worth more when times are panicky.

Another part of the answer is how dependent you are on the need for continued external financing.  Can you meet all of your obligations, with some room for error over the next two years?  Do you have excess assets to aid you if you have a sudden crisis?

Finally, if you have investments, look them over.  Examine what investments are sensitive to worsening credit problems, and remove weakly financed companies from your portfolio.  You should have some investments that are inflation-sensitive, like stock in industries that have pricing power (precious few 🙁 ), cash, TIPS, and foreign-currency demoninated bonds.  Now, carefully selected muni, mortgage and corporate bonds have value here, though don’t put on a full position at present.

In summary, it depends on your personal financial position, the firm and industry that you serve, and how much you have prepared to weather bad times in investing.  It’s not a pretty time as the leverage unwinds, but if you planned in advance for the possibility of trouble, then you should do adequately.