There will be a recession? And, if so, how bad will it be for my finances?
Those questions hang over Americans after the Federal Reserve once again high rates fight high inflationand the latest gross domestic product report showed that the slow economy for the second consecutive quarter. But at the same time, work and accommodation markets remain strong, although they have cooled down a bit.
That has created a lot of mixed signals. The White House and other government leaders say the economy remains healthy. But several economists say there’s a good chance of a recession in the next few months – yes one hasn’t started yet.
If there were to be a recession, here’s how it could affect your finances and what steps you can take to protect yourself.
In the past two years, pandemic-induced worker shortages, coupled with a structural shortage in which fewer young workers are replacing retiring workers, have given employees a lot of bargaining power.
Consequently, unemployment and job cuts have been at or near record lows.
“We have been in a period of extremely low layoffs and labor shortages. Companies have been reluctant to let anyone go,” said Andrew Challenger, senior vice president at global relocation firm Challenger Gray & Christmas.
That is starting to change, Challenger said. Layoffs have increased in some industries, including mortgage banking, fintech, construction and autos.
If a recession hits, layoffs are likely to be larger and more widespread. And employers can back down on hiring.
But not everyone will be at the same risk. If your position is in high demand, whether it’s as a frontline worker, IT engineer, or senior executive, chances are you’ll get a job, keep it, and even see increases and bonuses along the way.
the housing market it is not likely to be as badly affected by a recession as it was, for example, in the Great Recession of 2007-2009, which was caused by a credit and housing crisis.
Still, that doesn’t mean the market won’t be affected at all, especially if layoffs pick up, said Mike Fratantoni, chief economist at the Mortgage Bankers Association.
But after two years of double-digit price growth and wild bidding wars, the Home sales are slowly starting to return to a more normal pace thanks to growing mortgage ratesthat make homes less affordable for buyers.
Looking ahead, Fratantoni said, “we expect the unemployment rate to increase from small to medium, which, coupled with affordability challenges, will reduce demand. [for homes].”
That means home sellers will no longer be able to price their properties 15% higher than the selling price of your neighbor’s home. They must be prepared to accept buyer contingencies in housing offers. And they should expect their house to take longer to sell.
Oh, and appearances will matter again.
“Order a little to get it ready for the list. … We will return to a place where it matters if your home is in good condition,” Fratantoni said.
For homebuyers, relative to the crushing frustrations of the past few years, “it’s going to be a much better experience,” he said. While it will become more expensive to obtain a mortgage as rates rise, buyers will face less competition for each property. And when it comes to deciding whether to bid, “they may have a couple of days to think about it instead of hours,” Fratantoni said.
While you can’t control the business cycle, you can take some steps to mitigate the potential negative effects a recession could have on you.
Secure your emergency cash: For single-income households, California-based certified financial planner Jamie Lima of Woodson Wealth Management recommends having 12 months of living expenses on hand in case you lose your job.
For two-income households, he recommends six months, as both are less likely to be laid off.
If you don’t have that much now, cut out some non-essential expenses and add the money you would have spent on the kitty.
And if you own your home, consider getting a home equity line of credit before rates go up again, as it can help supplement your emergency reserves whenever you can resist using them for anything else, Lima said.
Test your financial plan: If there is a recession, you can come out unscathed. But you can’t assume that in advance. What you can do is figure out what resources you have to handle a worst-case scenario, like job loss or illness, Lima said.
“If you don’t have a job for a year, what does that look like? What are your contingency plans?…Now is the time to think about ‘What do I do?’” she said.
Improve your chances of staying employed: You may not be the highly sought after cybersecurity specialist that all Fortune 500 companies want. But if you make yourself indispensable at your current job, perhaps by taking on additional assignments, you may lower your chances of getting fired if it comes down to it.
Or, you could consider a new role that is less susceptible to layoffs when the economy is contracting. “If your job is in an industry or occupation where income depends on buyers with the discretion to postpone their purchases, start looking for jobs immediately for positions where that is not the case,” he said. Lakshman Achutanco-founder of the Business Cycle Research Institute, who believes there is a real risk that the recession will be longer and deeper than most expect.
Take a close look at cash flow if you own a small business: Small business owners should keep disbursements as flexible as possible, said Ben Johnston, chief operating officer of small business loan firm Kapitus.
The idea is to protect yourself in case demand drops in the coming months.
“This could mean [negotiating] more flexible payment terms with suppliers,” said Johnston. Or, it could mean avoiding a long-term commitment to new spending. So instead of buying new equipment or hiring a full-time employee staff member to take advantage of a new business opportunity today, consider renting the equipment or bringing in someone as a contractor.
“If you’re not sure how strong the economy will be in a few months…look for temporary forms of expansion rather than permanent ones,” Johnston said.