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Recession Survival Guide October 23, 2008, 5:00PM EST

Surviving the Storm

For the bold, opportunities abound: Strategies for managers, employees, investors, consumers, and borrowers

By Peter Coy

Arthur E. Giron

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When conditions are dire and people are losing their nerve, Traxis Partners hedge fund manager Barton Biggs pulls out a chart of the London stock market's performance during World War II. The fever line plunges as the German army invades Poland, Denmark, the Netherlands, Belgium, and France. Then an odd thing happens. Just when the mood is darkest—in June 1940, as Adolf Hitler is inspecting conquered Paris—the market finds a bottom and begins a long, steep rebound. It's almost as if investors sense that somehow, some way, Hitler is destined for defeat.

As those doughty Brits demonstrated nearly 70 years ago, fortune favors the bold. As long as you're not overleveraged, scary times like the current recession can present a perfect opportunity to make calculated bets. That's true whether you're a manager, an employee, an investor, a consumer, or a borrower. In this Recession Survival Guide, we'll share some of the smartest ideas we've heard for people in each of those roles. Most of us fit into all of them in one way or another.

With markets gyrating from day to day and the financial system still seeking its footing, no one can be sure what will happen next. Still, we'll try to dope out where the economy and financial markets are headed, and to suggest how BusinessWeek readers can survive and perhaps even thrive in their business and personal lives.

To be sure, it takes either iron self-control or Teflon self-delusion not to develop a bunker mentality in these difficult times. On Oct. 17, to pick just one day of bad news, the Reuters/University of Michigan's survey of consumer confidence posted its biggest one-month decline since it began more than 50 years ago, while the government said single-family housing starts hit a 26-year low. Glumness prevails. Faith Popcorn, the pop trend analyst, says: "If you go up Madison Avenue [in New York], past Fendi and Prada, those stores are empty. Women are shopping in their own closets. You feel shame in buying even if you can buy."

How much worse might things get? Possibly a lot. Nariman Behravesh, Global Insight's chief economist, forecasts a mild recession, but he sees about a one-third chance of something more—a 1.5% to 2% contraction in U.S. gross domestic product in 2009 as a whole, which would make this recession nearly as bad as the back-to-back downturns of 1980-82, which were the deepest since World War II. And the post-recession recovery could be painfully slow. Even after the mild 2001 dip, it took four years for employment to regain its pre-recession peak.

Credit crunches like the current one (except milder) contributed to all three of the last recessions. In 1980, the Carter Administration tried to cool off the economy with government-imposed credit controls and succeeded all too well, contributing to the sharpest quarterly downturn in real GDP growth in the past 50 years, a nearly 8% annualized decline, says JPMorgan Chase economist Robert Mellman. JPMorgan predicts the current squeeze will cause GDP to decline at an annual rate of 2% this quarter and the next, though the bank expects a healthy recovery in the back half of 2009.

SLOWING AND TIGHTENING

Expect the biggest hit to the sectors that most depend on credit availability, including the already depressed housing and auto markets. Consumer spending will suffer as Americans lose access to lending and attempt to rebuild their savings. Private, nonresidential construction, which remained strong long after the housing market tumbled, is headed for a crash of its own, predicts Global Insight's chief U.S. economist, Nigel Gault.

Government spending, by contrast, will increase to prop up the economy. Manufacturers (outside of autos) should continue to do comparatively well, despite the dollar's recent uptick and the slowdown in foreign markets. Stuart Hoffman, chief economist at Pittsburgh's PNC (PNC), predicts the unemployment rate will reach 7.5% to 8%, about as high as in the ugly aftermath of the 1990-91 recession, though not as bad as the 10.8% peak of the 1980-82 slump.

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