Here’s what a possible recession might mean for American consumers

Americans want to know: Is this a recession or not?

Formally, the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that spreads through the economy and lasts more than a few months.”

In fact, the latest quarterly GDP report, which tracks the overall health of the economy, showed a second straight contraction this year.

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However, both President Joe Biden and Federal Reserve Chairman Jerome Powell said we’re not in a recession just yet, pointing to a strong labor market and rising wages.

“One question has been answered, but the bigger question is not,” said Mark Hamrick, chief economist at Bankrate.com. “We now know that the economy has contracted for two consecutive quarters.

“It is not entirely clear whether the recession has begun with the continued strength of the labor market,” he said.

Even if the National Bureau of Economic Research does not declare a recession, the economy is far from dangerous.

High interest rates and persistent inflation pose great risks in the future.

Regardless of the country’s economic situation, consumers are struggling with extremely high prices, and nearly half of Americans say they are digging deeper into debt.

While this may sound different from previous downturns, there are certain things that rarely change.

3 ways a recession can hurt your wallet

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1. Finding a job may be more difficult: Recent indications are that the job market, which caught fire in 2021, may be starting to cool.

Employment has already slowed somewhat, while uncertainty is growing about the direction the economy is heading.

Although the unemployment rate remained slightly above the pre-pandemic low, “Powell appears to be warning us that the labor market is likely to weaken in a high interest rate environment amid the battle against historically high inflation,” Hamrick said.

The Federal Reserve on Wednesday announced another big interest rate hike of 0.75 percentage point to calm things down — particularly inflation, which remains at a 40-year high.

There are more headwinds that markets face than tailwinds.

Douglas Bonbarth

Head of Bone Fide Wealth

2. Your investments may falter: Meanwhile, fears that the Fed’s aggressive moves are pushing the economy into a recession have sent markets slumping for weeks on end.

“All asset classes have enjoyed that last shot of liquidity over the past two years,” said certified financial planner Douglas Bonbarth, president of Bone Fide Wealth in New York. Now, “there are more headwinds that markets face than tailwinds.”

In times of turmoil, some advisors recommend switching to stocks that pay high dividends while sticking to short-term fixed income assets to spot.

However, Boneparth also advises clients to look for opportunities.

“Good investors need to be adept at not just buying on the upside but buying on the way down,” he said.

During the recent recession, he said, “anyone aware of the past would have enjoyed some of the biggest discounts in the capital markets.”

3. Home price inflation will fall: Home prices haven’t fallen completely, but they haven’t risen as quickly as before, and the recession is very likely to slow the housing market as a whole, according to Jacob Channel, LendingTree’s chief economist.

Lending standards can also be tightened, meaning that many potential homebuyers may find it difficult to get a loan, or will have to pay a higher interest rate to close the deal. “Overall, this means that the recession will make it more difficult for people to get mortgages and buy homes,” the channel said.

But he added that this would not be “similar to 2007-2008”.

The channel said the housing market is in a much better place than it was in the early 2000s. And even if prices fluctuate, “as long as you stay on track and keep making your payments, you will likely end up being fine.”

How do you prepare for a recession?

While the impact of the recession will be widely felt, each household will experience a downturn to a different degree, depending on income, savings and financial situation.

However, there are still several ways to prepare that are universal, according to Larry Harris, president of Fred F. Keenan of Finance at the University of Southern California’s Marshall School of Business and a former chief economist at the Securities and Exchange Commission.

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Here’s his advice to consumers:

  • Simplify your spending. “If they expect that they will have to cut back, the sooner they do it, the better off they will be,” Harris said. This could mean cutting some expenses now that you only want and don’t really need, like the subscription services you signed up for during the pandemic. If you don’t use it, lose it.
  • Avoid variable rates. Most credit cards have a variable annual percentage rate, which means there is a direct connection to the Federal Reserve standard, so anyone with a balance will see the interest fee jump with every move by the Fed. Homeowners with adjustable rate mortgages or home equity lines of credit, which are tied to the base rate, will also be affected.

    This makes this a particularly good time to determine your outstanding loans and see if refinancing makes sense. “If there is an opportunity to refinance at a fixed rate, do it now before interest rates go up any further,” Harris said.

  • Stash extra cash in Series 1 bonds. These inflation-protected assets, backed by the federal government, are virtually risk-free and pay a 9.62% annual rate through October, the highest ever return.

    Although there are purchase limits and you can’t cash in on the money for at least one year, you’ll get a much better return than a one-year savings account or certificate of deposit, which pays as little as 1.5%.

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