It may look, feel and cost like a recession. But is it really a recession?
Despite rising inflation and ebbing financial confidence, current economic conditions don’t yet meet the technical standard of a recession. But that hasn’t stopped many economists and business leaders from calling it one.
Take Cathie Wood, the prominent U.S. investor and founder of ARK Invest, who has joined the chorus of financial experts weighing in.
“We think we are in a recession,” Wood said in a recent CNBC interview. “We think a big problem out there is inventories — the increase of which I’ve never seen this large in my career. I’ve been around for 45 years.”
Whether Wood is right or not, American households should watch for more telltale signs of trouble — and make a few savvy moves to ensure their finances stay solid.
Mitt Romney says a billionaire tax will trigger demand for these two physical assets — get in now before the super-rich swarm
Warren Buffett likes these 2 investment opportunities outside of the stock market
There’s a ‘perfect storm’ brewing in the multifamily housing market — here are 3 of the easiest ways to take advantage
Who decides if it’s a recession or not?
Typically, the National Bureau of Economic Research (NBER), a nonpartisan body whose measurements of the country’s economic health provides financial watchers with the de-facto labels of recession or mere downturns.
To label it a recession, NBER has to observe a significant decline in economic activity across the economy over a period of more than two consecutive quarters.
But NBER acknowledges that not all recessions always meet that strict definition. While the 2008 recession saw three out of four quarters of economic decline in 2008 and two in the first half of 2009, the recession of 2001 did not see two quarters of economic decline.
That's because while the three primary factors of an economic fallback — the depth of a downturn, its breadth across the economy and its length — must meet individual markers, the power in any one of those conditions could offset weaker indications from another.
Along with GDP, NBER’s panel of eight research economists considers multiple factors, like personal income, employment, consumer spending, industrial output and inflation-adjusted wholesale and retail sales.
Together that data provides an exhaustive statistical snapshot that aims for a technical definition, if not a practical one.
But some signs can’t be ignored
Sometimes, however, the strict definition is outpaced by real-world conditions. And those conditions are now sending mixed signals.
The jobs market remains robust, with employers adding 372,000 jobs in June.
But consumer confidence has slumped to near-record lows. The preliminary July numbers from the University of Michigan’s consumer sentiment index show this metric is now at 51.1, down roughly 30 points from a year ago.
Overall consumer perceptions of their personal finances have reached their lowest point since 2011, noted Joanne Hsu, a research associate professor and director of U-M’s consumer surveys department. She added spending has stayed high — possibly explained by easing of supply constraints and consumers anticipating even higher prices down the road — which could also exacerbate inflation.
Meanwhile, the producer price index — which measures inflation at the wholesale level before it reaches consumers — rose 11.3% in June, the latest sign that higher prices are squeezing consumers.
The Fed is likely feeling the pressure from all sides. But using rate hikes to cool the economy to curb inflation has raised concerns that these hikes will further cut into consumer demand. That could in turn lead to less corporate profit and, ultimately, job losses.
The medicine, some Fed critics contend, becomes the illness itself.
The power of positive (and negative) thinking
There’s one potentially powerful reason why NBER’s declaration — or lack of one — could be important.
Economists have long understood that market conditions and consumer psychology both play large roles in our economy.
If consumers think we’re in a recession, spending will likely drop, and that affects the economy. An Economist/YouGov poll recently found that nearly 60% of Americans believe the nation is in a recession.
Whether the average American will check their economic confidence against NBER’s metrics, however, is another story. But announcing the country is in a recession before it actually is may be enough to tip it in that direction, which NBER’s panel is no doubt conscious of.
Managing these tough times
For average consumers, the rising cost of living is often a telltale sign of economic downturn.
Gas prices, though they’ve fallen somewhat in recent weeks, remain high. Inflation has pushed grocery bills higher, and discretionary money aimed at the occasional splurge — eating out or picking up a new pair of running shoes — doesn’t go as far as it used to.
Recession or not, consumers should be prepared for the rest of the year to be rocky. But with a few straightforward actions, you can ensure you come out of this downturn with your finances on an upswing.
Make the bear your friend. For many Americans, 401(k) or Roth IRAs are the primary household investment vehicles, and slumping stock valuations mean the same money you’re now pouring into the market on a regular basis is buying up more shares at lower prices.
When the market rebounds — as it always has before — so will your portfolio but at a greater rate. Think of the extended downturn as an extended buying opportunity.
If you’re invested now but your monthly cash flow no longer covers your bills and living expenses, consider pausing — but not withdrawing — your 401(k) investment until inflation cools.
Early withdrawals from your 401(k) will trigger penalties, tax consequences and could harm your long-term goals.
Kill your debts. If you have the available cash, consider reducing or erasing your credit card balances. For credit card holders, the rise in interest rates usually results in a card’s interest rate doing the same, which means it becomes suddenly much more expensive to carry a balance on those already high interest cards.
Consider online banks for savings. Online banking institutions are busy hiking their savings rates. For instance, two of the biggest names — Ally and Marcus — recently raised the return rates on their basic savings deposit accounts, which often happens when the Fed hikes rates.
Marcus, in particular, predicts on their website that the Fed will ultimately raise interest rates seven times before the end of 2022 and make quarterly hikes in 2023. If online banks raise their savings rates accordingly, those online savings accounts could act as a small hedge against a slumping stock market.
What to read next
A TikToker paid off $17,000 in credit card debt by 'cash stuffing' — can it work for you?
‘There’s always a bull market somewhere’: Jim Cramer’s famous words suggest you can make money no matter what. Here are 2 powerful tailwinds to take advantage of today
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.