Liz Ann Sonders, Beth Kindig, and Jared Dillian provide insights on Fed rate hikes and the stock market in ‘Making Money.’
the united states economy may or may not be in a recession, but economists generally agree that a recession is looming due to high inflation and higher interest rates.
Gross domestic product (GDP), the broadest measure of goods and services produced in the country, has already fallen for two consecutive quarters, meeting the technical but unofficial criteria for a recession.
The economy contracted 1.6% from January to March and fell another 0.9% in the April to June period. The Commerce Department is to release revised second-quarter GDP figures on Thursday morning, which are expected to show the economy remained in a hole last quarter.
Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, falling incomes and slowing retail sales, according to the National Bureau of Economic Research ( NBER, which tracks recessions.
IS THE UNITED STATES ENTERING A RECESSION?
A “now hiring” sign outside a restaurant in Rehoboth Beach, Del., on March 19, 2022. (Stefani Reynolds/AFP via Getty Images/Getty Images)
The NBER, the official arbiter, typically waits up to a year to declare recessions, which require a “significant decline in economic activity that spreads throughout the economy and lasts more than a few months.” The nonprofit group has also emphasized that it relies on more data than GDP to determine whether there is a recession, such as unemployment and consumer spending, which remained strong in the first six months of the year. It also takes into account the depth of any decline in economic activity.
“Thus, real GDP could decline by relatively small amounts in two consecutive quarters without justifying a determination that a spike has occurred,” the nonprofit said on its website.
The committee does not meet regularly, only when the members decide it is warranted.
There are mixed signals about the health of the economy, fueling the debate about the state of the economy. The number of Americans filing for unemployment benefits has gradually increased, businesses have announced layoffs or hiring freezes, and the housing market is weakening.
At the same time, unemployment remains near an all-time low and consumers continue to spend heavily, despite blistering inflation.
The Federal Reserve Board building on Constitution Avenue is pictured in Washington, DC, March 19, 2019. (REUTERS/Leah Millis/Reuters)
Although economists remain divided on whether the economy is officially in a recession, they largely agree that avoiding a recession in the near future will be nearly impossible as the Federal Reserve tries to control inflation by cooling consumer demand.
Whether a recession is imminent or further away, here’s what Americans can do with their finances to prepare.
1. Re-evaluate your budget monthly
Experts advise that Americans take a close look at where they spend their money each month and take stock of where they can cut back. To be well prepared for a recession or other financial headwind, people should have an emergency fund that covers at least three to six months of living expenses and, ideally, some retirement savings, according to Equifax.
US ECONOMY HEADING FOR RECESSION IN MID-2023, MOST ECONOMISTS SAY
“If you don’t have at least three to six months of basic cash expenses, then set that as your financial goal,” the credit reporting agency said. “Start by developing a basic understanding of how you’re spending your money and building a budget.”
2. Invest money you can afford in low-risk assets
Mike Charalambous, director of London-based website Invezz, said people should assess how much money they can afford to invest and consider buying some low-risk assets.
Jerome Powell, Chairman of the US Federal Reserve, speaks during a news conference following a meeting of the Federal Open Market Committee in Washington, DC on May 4, 2022. (Al Drago/Bloomberg via Getty Images/Getty Images)
“Some companies are less affected by economic cycles, while the rest of the economy suffers,” he said. “Adding them to your portfolio before, or when a recession hits, is usually a good move.”
The areas in which these companies tend to operate include consumer staples such as supermarkets, manufacturers of alcoholic beverages, cosmetics, and health care.
3. Pay off debt
Evaluate your debt and try to pay off any debt with a high interest rate right away. It will help those who lose their jobs, but it will also help people face higher rates as the Federal Reserve raises the benchmark fed funds rate.
The national average credit card rate recently rose above 17% for the first time in more than two years as a result of Federal Reserve rate hikes, according to CreditCards.com.
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4. Build your resume
Recessions often result in higher unemployment rates, so it’s important to consider job security and other potential career opportunities. Try to brush up on your job search tools before a possible job loss.
“As you review your past work experience, look for gaps,” Equifax said. “Are there places where you could pursue continuing education or additional training? Expanding your skill set is one of the best ways to invest in yourself as an employee. This is true even if you can hold your position during a recession.”
President Biden delivers remarks before signing into law HR 5376, the Inflation Reduction Act of 2022, in the State Dining Room of the White House on August 16, 2022. (Demetrius Freeman/Mademoiselleosaki via Getty Images/Getty Images)
5. Stay invested
The recent market volatility is disconcerting and could tempt some to start selling stocks in an effort to reduce exposure and limit losses.
But experts have urged investors to stay the course and stay focused on longer-term investment goals, not day-to-day swings.
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“If you’re saving for the long term, your focus is on the next 10, 20, 30 years,” Principal Asset Management said. “We live in a 24/7 news cycle, and that makes it tempting to react to everything you hear. What may seem like a great moment at the time, in the long run it may be remembered as a simple blip on the radar screen.”