Holiday Spending Won't Prevent a Recession

Black Friday was a Good Friday for retailers. However, holiday spending is not enough to prevent a recession. Consumers are finally facing their financial reality, after many years of living beyond their means.

With a rise in energy prices, slowing job growth, poor wage increases, and decreasing house values, American's wealth is shrinking. Shrinking wallets equals less spending. Less spending could push the U.S. economy into a recession. Consumer spending accounts for three-quarters of all U.S. economic activity.

The free-for-all spending that consumers have enjoyed the last twenty-five years is slowing. Easy access to credit has fueled excessive consumer spending in the past. But that is now changing. Financial institutions are raising and tightening the standards for lending money in response to billions in losses from bad loans.

Debt-ridden consumers are forced to face the reality from years of over-spending. Excessive borrowing has tapped their ability to save. The Bureau of Economic Analysis shows personal savings rate at just over zero.

The stock market is showing signs of strain and pressure from the housing slowdown and the perceived cautiousness from investors. Consumers are confused and confusion creates fear. This typically results in consumers pulling out of risky stocks and putting money into safer investments. According to the Reuters/Zogby poll released in November, 40% of Americans believe the economy will be in a recession next year.

Sales from this holiday season will not be as robust as in previous years. Consumers are cutting back their holiday budget because of higher gasoline prices and a perceived uncertain future.

What is a recession? A recession is defined as two or more consecutive quarters of declining economic output.

Five Signs of Recession:

1. Housing crisis. Foreclosures are up, house prices are declining and mortgages rates are adjusting upwards.

2. The declining value of the dollar.

3. Drop in consumer spending.

4. Increased job losses.

5. Rise in interest rates.

Five Ways to Prepare for Recession:

1. Build an emergency fund. It's important to build an emergency fund to cover three to six months of living expenses.

2. Delay large purchases. Put off any large purchases that you can until your finances are in order.

3. Reduce all debt. Pay down debt as fast as you can and don't take on any new debt.

4. Increase your income. Get into a higher paying job by changing careers. Look for additional training certification classes you can take to increase your knowledge in hopes of securing better paying job.

5. Prepare a budget. Now is the time to budget your spending so you spend wisely and save. Develop a plan now to get you and your family through a recession. A recession may not happen but it pays to be prepared. Diversify your portfolio, build an emergency fund and control your spending, these steps will help you through a recession.