It’s been a tough year for your money. Inflation probably stretches your dollars beyond their limit. Especially if you’re filling up your car’s gas tank, running errands, or trying to take a post-pandemic vacation. And signs of a possible recession some consumers and financial professionals feel very nervous.
But remember, not all recessions are the same. And if we’ve learned anything from the past few years, it’s to expect the unexpected. To get some perspective on the current state of the economy, we brought in a team of experts to find out when the US could potentially enter a recession and how to prepare for it.
Meet the Experts
Note: Answers from experts have been edited for length and clarity.
When could the United States enter a recession?
Predicting when a recession might hit is like trying to set the release date for a new Rihanna album. We’re pretty sure it will happen at some point, but we don’t know when.
Claudia Sahm, founder of Stay-At-Home Macro Consulting and former Federal Reserve economist, notes that recessions are not meant to be predictable. And certain factors (for example, a global pandemic or a major war) can add to the risk of an economic downturn.
“The chances of a recession are higher now than they were in 2019,” Sahm says. The ongoing pandemic and Putin’s invasion of Ukraine have added enough chaos to the economy that a recession seems more likely than it did three years ago. “When I look at what’s happening in the world right now, I think the most likely scenario is that we either avoid a recession – or have a relatively mild recession,” Sahm says.
Historically, the US economy has evolved in cycles, with recessions occurring every few years after sustained periods of economic growth. But Kathryn Edwards, an economist at RAND Corporation, reminds us that “the United States could still slip into a recession, as any number of shocks or significant disruptions could hit various parts of our economy.” In July 2019, the United States set a record for the longest period of economic expansion in history, growing for more than 10 years. Then the pandemic hit. “It was totally unexpected and created a short but severe recession in 2020,” Edwards says.
Why is the risk of recession particularly high at the moment?
*Gestures to everything.* Even if we want to leave the pandemic behind us, we are still living it. See: Ongoing supply chain disruptions, workforce reductions and general uncertainty – all of which have contributed to record inflation.
The Fedthe role of in all of this is to bring inflation down, but their tools to do so (hi, rate hikes) are not infallible. Because higher rates mean it’s more expensive to borrow money and businesses, in turn, slow growth by cutting back on hiring or even laying off employees. “In the past, when we had high inflation, it was difficult for policymakers to get it under control without people losing their jobs,” Sahm says.
While some factors — such as low unemployment and strong consumer spending — are helping to calm recession fears, they face some pretty massive and unprecedented challenges.
“I think it’s safe to say that the U.S. economy hasn’t experienced a confluence of shocks like we’ve seen over the past two and a half years in a very long time, if ever,” says Kristina Sargent, assistant professor of economics. at Middlebury College. “The uncertainty this generates is, I think, the main risk factor for a recession in the near future,” she adds. “Policymakers have not had to react to shocks of this particular nature and combination in modern policy settings, so it is unclear what the optimal policy should be.”
How does consumer sentiment affect recession risk?
While policymakers – like the Fed – are tasked with keeping the economy in good shape, consumers also play a major role. And panicking about a recession isn’t it. Sahm points out that fear of recession may actually increase its likelihood. “If you shout ‘we have a recession!’ then people massively reduced their spending. Well guess what? We have a recession,” she explains.
That doesn’t mean you should keep spending — which could get harder according to Mallika Pung, an economics professor at Rice University — just to keep the economy strong. “As consumers and producers adjust to deteriorating purchasing power and rising costs, we could start to see a destruction of aggregate demand leading to lower job creation and a recession” , says Pung.
While it’s prudent to take steps to protect your finances from a possible recession (more on that later), if consumers go overboard, it can hurt the economy. Increasing your savings by reducing your expenses is a good idea in case you lose your job, but “these actions increase the likelihood that the economy will enter a recession, because this decrease in expenses is a loss of income for someone other,” Sargent says.
What could differentiate this potential recession from past downturns?
By definition, certain symptoms usually appear when we are heading into a recession: high unemployment, low production and a slow economy. But the COVID-19 pandemic has changed the playbook, making people reconsider how they want to spend their time (hi, big quit) and money (goodbye, streaming; hello, travel).
So while the Fed may strive to control inflation by making borrowing more expensive, its power is limited. “The limit of what the Fed can do for inflation means: one, either inflation will stay high, or two, they will have to lower demand to lower inflation,” Edwards explains. “The latter is synonymous with a (probably severe) recession. We don’t know what will happen. »
Moreover, the uncertainty of the pandemic and the war in Ukraine makes the job of the Fed even more difficult. “Our usual tools and mechanisms may not apply in this context,” Sargent says.
Should I be worried about my job?
Somewhat. High unemployment is one of the hallmarks of a recession, but certain industries or jobs could be more at risk of cuts. “Most people in a recession don’t lose their jobs,” Sahm says. “But the number of people losing their jobs is increasing.”
While many people will keep their jobs even during the worst of recessions, “Globally, those who are the most vulnerable in our society will be forced to bear the brunt of the impact – people with little or no savings, people with less secure jobs, people with less secure housing,” says Sargent. “It’s because those people have the least amount of cushion to fall back on if something goes wrong.”
And the loss of a job can have devastating effects beyond the loss of income. “With job losses comes a loss of employer-provided health insurance, which leads to an increase in the number of uninsured people in the economy,” says Pung. “Those close to retirement may see a decline in the value of their retirement savings due to the stock market crash, which may cause them to delay retirement.”
Even those who don’t lose their jobs could see their hours worked or their earnings drop, as companies fend off the recession on their own by skipping bonuses and raises. And don’t forget your family or anyone’s money that impacts you. “Most people’s financial networks are not made up of just one person,” Edwards points out. “A blow to their parents, siblings or grandparents could affect them, even if they are otherwise well.” (Hi, sandwich generation.)
How can I prepare for a possible recession?
It’s always a good idea to make sure your emergency fund is ready to go, just in case. “The perfect plan for losing your job is to save six months of living expenses,” says Edwards. “But it’s not a reasonable plan and probably not something you could achieve in the short term.” Which means, stack what you can now, but don’t worry about hitting the six-month spend mark.
Plus, there are other steps that can help you prepare – and may cost you nothing. Like making sure you’re ready to look for your next job if you have to. Pung recommends adding a few bullet points to the skills section of your resume. “Always keep developing and learning skills that are in high demand in your industry,” she advises. “Grow with the industry and make yourself indispensable to your business. This will help with job security and job search should you find yourself in the unfortunate position of being laid off.
Bonus points if you were hit by one of the last major recessions and already have some insight into the situation. Were you fired when the pandemic started? Was your family home foreclosed in the mid-2000s? Sahm recommends imagining what you would do differently and thinking about what you would say to your past if you could give them a warning. Many of the steps you can take (think: diversify your portfolio) won’t hurt if a recession doesn’t happen after all. Hint: Better be prepared.
Don’t panic. If a recession comes, you cannot prevent it. What you can do is put yourself in the best possible situation for the worst outcome. Stack your savings and secure your job as much as you can. Recession or not, Future will thank you.