Is The US Officially In A Recession? What To Know About Layoffs, Debt And Investing

what's happened

According to the latest data, the US is in a recession, maybe a recession.

Why is it important?

Recessions have always been characterized by periods of massive layoffs, bankruptcies, higher borrowing costs, and stock market volatility.

and after

Gather information to protect your finances. No one can predict the future and it is important to act calmly and deliberately.

Earlier this week, the Federal Reserve again raised interest rates by 0.75 percentage points in its fourth attempt to curb runaway inflation. But economists and financial experts fear a recession is inevitable. Technically, a country is in a recession when the gross domestic product, the value of all goods and services produced in a given period, falls by two-quarters. And here are the results: According to preliminary estimates by the Bureau of Economic Analysis, GDP fell 1.6% in the first quarter and 0.9% in the second quarter.

While all signs point to a recession, in the United States the National Bureau of Economic Research is identifying it—and it has yet to be called a recession.

At the moment, we can't call it a recession or a game of semantics.

After all, every day Americans struggle with rising prices, rising borrowing costs, and rising layoffs across the country. I answered a few questions from listeners on my So Money podcast about how best to prepare, save, invest and manage smart money during these uncertain times.

First, what to expect from a recession?

It's always good to take a step back and consider the effects of a recession so we can live up to our expectations. While each recession varies in duration, severity, and impact, we tend to see more layoffs and rising unemployment during economic downturns. Access to the credit market may become more difficult, and banks may be slower in lending due to concerns about default rates.

See also: The economy is bad. What history tells us

As the Federal Reserve raises rates in an attempt to curb inflation, we will see the cost of borrowing rise even more - for mortgages, auto loans, and business loans, for example. So, even if you qualify for a loan or credit card, the interest rate will be higher than in previous years, making it harder for the family to get a loan or pay it off. We are already seeing this in the housing market, where the average 30-year fixed mortgage rate has recently hovered around 6%, the highest level since 2009.

During a recession, when rates rise and inflation slows, the prices of goods and services may fall and our personal savings rate may rise, but it all depends on the labor market and wages. As we saw during the Great Recession of 2009, we can also see an increase in entrepreneurship as the new unemployed often look for ways to turn the idea of ​​a small business into a reality.

Will layoffs stay here?

With an unemployment rate of 3.6%, the labor market seems to be the only stable part of the economy, at least for now. But that may be temporary as companies struggling with current financial pressures, including inflation, rising interest rates and weakening consumer demand, have already begun to announce layoffs. Layoffs.fyi, a website that tracks job losses at tech startups, reported nearly 37,000 startup layoffs in the second quarter of 2022. Shopify announced this week that it is cutting layoffs by about 10%, or about 1000. CEO Toby Lutke said the trading company's pandemic-focused growth plans "didn't pay off."

During the Great Recession, unemployment reached 10% and it took an average of eight to nine months for the unemployed to find a new job. If you think you're short on funds, it might be time to reevaluate your emergency fund. If you can't afford the minimum spending for six to nine months, which is difficult for most people, consider whether you can speed up your savings by cutting expenses or saving up some extra money. Now is the time to make sure your resume is up to date and connect with the influencers in your professional and personal network. If you get laid off, be sure to file for unemployment benefits immediately and get health insurance.

If you're self-employed and worried about a possible downturn in the industry or losing customers, explore new sources of income. Then also aim to increase your cash reserves. However, if past recessions have taught us anything, it's that cash unlocks its benefits and allows for better control in difficult times.

Will my loan and interest rates increase?

As the Federal Reserve continues to raise interest rates to fight inflation, managed interest rates will rise, pushing up annual interest rates on credit cards and loans and making monthly payments more expensive. Ask your lender and card issuer about low interest rate loan options. See if you can refinance or combine your loans into one fixed rate loan.

During previous recessions, some financial institutions were reluctant to lend as often as they would normally. This can be a problem if your business is dependent on credit for growth, or if you need a mortgage to buy a house. It's time to pay close attention to your credit score, which is an important factor in a bank's decision. The higher your score, the more likely you are to qualify and get the best reward.

Should I stop investing in my 401(k)?

With stocks in a downward spiral, many want to know how a recession might affect their long-term investments. Should we stop investing? The short answer is no'. At least not if you can't help it. Avoid panicking and cashing out during a bear market because you may not be able to tolerate volatility or see down arrows.

My advice is to avoid squats. It may be time to reevaluate your investments to make sure they are well diversified. If, for any reason, you notice a sudden change in risk appetite, talk to a financial expert to determine if your portfolio needs to be adjusted. Some online robo-advisor platforms offer customer service and can provide advice.

Historically, it has been profitable to stay in the market. Investors who cashed out their 401(k) during the Great Recession missed the bounce. Despite the recent decline, the S&P 500 is up nearly 150% from its inflation-adjusted 2009 low.

Warning: If you really need the money you get from the stock market for urgent expenses like medical bills and you have no other way to pay for it. In this case, you can explore 401(k) loan options. If you decide to take out a loan from your retirement account, try to pay it back as soon as possible.

Should I wait to buy a house?

With rising mortgage rates and falling home prices not cooling down fast enough, it can be more expensive to own a home than it is to rent. An April report by real estate consultancy John Barnes looked at the cost of owning and renting in the United States and found that owning costs $839 per month more than renting. That's almost $200 more than at any time since 2000.

Fixed rates on 30-year mortgages have almost doubled since last spring, helping to slow supply and lower home prices, but competition among buyers remains fierce due to the historical downturn. In many markets, all the money betting and bidding wars are going on. If you haven't been able to buy a home in the past few months or years, you may feel tired and depressed.

As I said in my newsletter: don't be hard on yourself. If you haven't bet high yet, you're not doing anything wrong. While it's true that a fixed rate mortgage can give you more predictability and budget stability as long as inflation continues to outpace wages, renting may have some benefits right now. First of all, you are not buying a house on the market, which some economists predict will soon burst. If you have to leave the house within a year or two during a possible recession, you risk selling at a loss.

Second, leasing saves you money that you would otherwise spend on down payment and closing costs, and helps you stay more liquid in times of great uncertainty. This allows you to quickly bounce back and secure your finances in an economic downturn. Remember: money is power.

See also: Should you buy a house in 2022 or wait? There are 3 factors to consider

My final comment is that it's important to remember that recessions are part and parcel of the business cycle. Long-term financial planning will always face downtime. The United States has experienced almost as many recessions since World War II, and they usually end in about a year. On the other hand (and to give you better news), periods of expansion and growth are more frequent and more expensive.

recession expectations