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Curb Your Enthusiasm

I didn’t like what I heard from one of my favorite economists when I ran into him at a party on New Year’s Day. It was hard to converse while holding plates and chewing ribs, but I caught the gist and called him later to learn more. We talked about jobs, investing and how the economy might change in the years immediately ahead.

Lakshman Achuthan is a managing director of the Economic Cycle Research Institute in New York City, where he studies—and forecasts—changes in the business cycle. He sees a resiliant economic recovery, with the job numbers turning positive within the next few months. But he doubts that the upturn will last long enough to put America back to work. Only some of the 7 million lost jobs will be recovered before the next recession strikes. The Teens could well be a decade of more frequent recessions with shorter recoveries in between. That implies chronically high unemployment for years to come.

Ever since World War II, each upturn has been a bit slower than the one before, with the post-2002 upturn the weakest on record. Lakshman’s forecast assumes that that pattern continues. As for the length of the current recovery, everything depends on when the Fed starts raising interest rates. Too soon, and the economy sinks immediately. Too late, and inflation takes hold, which would force even higher rates and a sharper downturn. Even if the Fed gets its decision just right, and the economy keeps coasting along, it won’t gain enough strength to reduce unemployment significantly.

What’s the takeaway, if Lakshman is right? Go conservative with money, in case the next recession comes sooner than expected. If you missed the 65 percent stock market rally of 2009, it’s too late to repent. Keep some money in stocks but shift your investments toward cash or high-quality bonds (U.S. and foreign government securities, and quality corporates). When business slows, bonds will hold up better than stocks. Recessions also smother inflation, which will bring the gold price down (buy gold only if you think that the dollar will turn to dust). Emerging markets in Asia, Latin America and India may do better than the mature economies of Europe and the U.S. Shift your investments in that direction.

Finally, save more money. If we’re facing a decade of jobless recoveries, we’re all going to need the cash. If Lakshman turns out to be wrong, our extra savings will give us happier retirements than we imagine now.