Many market watchers are predicting a recession in 2023 as the Fed continues to raise interest rates in its battle against 40-year-high inflation.
Due to a persistently hot job market, a recession is not a certain fate, but the economy has already contracted for two quarters in a row, and a period of cooling off after the blistering recovery from pandemic shutdowns is only logical, some analysts say.
Recessions inspire fretting from CEOs and workers alike, but they’re a normal part of the business cycle.
Recessions are also retroactively designated, so when the next one begins, consumers won’t know it until after the fact. That means it may be a good idea to start preparing for a recession now.
Here are a few ways to get in good financial shape for a recession.
Take advantage of a red-hot labor market while it lasts
A hiring sign is displayed at a retail store in Buffalo Grove, Ill.
At least one economic projection has put the likelihood of a recession within the next 12 months at 100 percent, but there’s hardly a consensus on when or even if a recession is going to occur.
A big driver of that uncertainty is the job market, which shows high demand for workers, implying continued growth in the economy.
This is a significant factor considered by the National Bureau of Economic Research (NBER), whose Business Cycle Dating Committee is the official designator of recessions.
“Virtually everything points in the opposite direction from the slight fall in GDP measured on the product side,” Jeffrey Frankel, a former member of the committee, said in an interview, referencing gross domestic product.
“You just can’t call it a recession when you have the ratio of vacancies to unemployed workers the highest it’s ever been. I mean, that’s just so far from a recession,” he said.
Many workers have been taking advantage of the high demand for labor, quitting their jobs over the past year and looking for better work in what’s come to be called the Great Resignation.
Since there are still so many more open jobs than people who need them, as illustrated by the vacancy-to-unemployment ratio, conditions favorable to workers look set to continue.
A March survey from Pew Research found increased benefits to switching jobs, such as better pay, upward mobility and improved work-life balance.
Workers have also been unionizing, striking and threatening to strike in the face of rising inflation. A possible railroad strike in September promised to shut down huge segments of the U.S. economy and required action from the White House to avoid. Lumberjacks in Oregon and nurses in Minnesota also walked off the job last month.
On Monday, Treasury Secretary Janet Yellen met with labor federation AFL-CIO President Liz Shuler and Policy Director Damon Silvers about the strength of the U.S. labor market, which added 3.8 million jobs in the first nine months of 2022 for the second strongest year-to-date gain in over 75 years, according to the Treasury.
Keep an eye on the housing market
For sale by owner sign is displayed outside home in Northbrook, Ill.
In the U.S., the housing market is another major driver of inflation, with rents and mortgage rates soaring amid a national housing shortage that numbers in the millions of homes, according to various studies and commercial estimates.
Shelter costs count for more than 30 percent of the consumer price index and about 40 percent of core inflation, which removes the volatile categories of energy and food. Core inflation rose 0.6 percent in both September and August and is up 6.6 percent on the year – the same as last month.
For renters and people paying mortgages, there isn’t a whole lot to do besides trying to stay out of an unfriendly market and make do.
Real estate investors are likely to feel the same way, as “prospective homebuyers remain reluctant to jump into the housing market,” according to a statement last week from Mortgage Bankers Association President Bob Broeksmit.
Adjust personal finances
Careful spending and saving is critical during a recession.
With the Fed raising interest rates, paying for goods and services with financing is going to get more expensive. So experts say that putting off major purchases and paying down debts now is a good way to save money as interest rates creep up toward 4.6 percent in 2023, according to the latest median estimate from the Fed.
Getting approved for personal or business loans may also become more difficult, as banks put more scrutiny on applicants who may have a tougher time paying money back at a higher interest rate.
While commercial lenders have been increasing their own rates to keep up with the Fed’s, they have not passed these rates onto their customers.
Savings accounts average a 0.21 percent return, according to the FDIC, despite a federal funds rate that’s now about 3 percent.
Due to the increased risk of layoffs during a recession, many personal finance experts also recommend that households set up an emergency fund in the event that earners get fired by their employers.
Consider investing in bonds
A person walks past a Wells Fargo location in Philadelphia.
Unless you’re a professional investor who pays attention to daily market movements, it’s hard to take advantage of wild swings in the stock market created by the environment of rising interest rates.
In recent weeks, the Dow Jones Industrial Average has frequently seen trading days with gains and losses that number in the hundreds of points, and while such volatility can be attractive to day traders, it doesn’t present much of an opportunity for full-time workers.
Most major stock indices are way down on the year — most in the ballpark of 20 percent — so investing directly in companies or index funds can seem like a risky proposition.
But as interest rates have climbed, leading to turmoil in equities and increasing the power of the U.S. dollar, the typically less dynamic bond market has seen a steady rise in returns. The two-year U.S. Treasury note now has a 4.4 percent yield and the 10-year has a 3.9 percent yield.
Jason Blackwell, head of investments at financial firm The Colony Group, said in an interview that U.S. bonds are “potentially a better tool at [investors’] disposal than they have been for the last ten years.”
“When 10-year Treasuries with very little risk of U.S. default are paying you 4 percent, that’s a pretty good return – a pretty good yield that we’ve not seen in almost a decade,” he said.