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Here’s what a possible recession could mean for American consumers

Americans want to know: is it a recession or not?

Officially, the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that extends throughout the economy and lasts for more than a few months.”

In fact, the latest quarterly gross domestic product report, which tracks the overall health of the economy, showed a second straight contraction this year.

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However, President Joe Biden and Federal Reserve Chairman Jerome Powell have said we are not in a recession yet, pointing to strong labor markets and rising wages.

“One question is answered, but a bigger one isn’t,” said Mark Hamrick, senior economic analyst at Bankrate.com. “We now know that the economy has contracted for two consecutive quarters.

“It’s not entirely clear if a recession has started given the continued strength in the labor market,” he said.

Even if the NBER does not declare a recession, the economy is far from being out of the woods.

Higher interest rates and relentless inflation present major dangers for the future.

And regardless of the country’s economic situation, consumers are struggling with exorbitant prices, and nearly half of Americans report taking on more debt.

While it may look different from previous slowdowns, some things rarely change.

3 Ways a Recession Could Hit Your Wallet

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1. It might become more difficult to find a job: Recent signs show that the labor market, which was on fire in 2021, could start to cool.

Hiring has already slowed somewhat, while uncertainty is high about the direction of the economy.

Although the unemployment rate remained just above the pre-pandemic low, “Powell seems to warn us that the labor market is likely to weaken in this environment of higher interest rates amid the struggle against historically high inflation,” Hamrick said.

The Fed on Wednesday announced another big rate hike of 0.75 percentage points to calm things down, especially inflation, which remains at its highest level in 40 years.

There are more headwinds facing markets than tailwinds.

Douglas Boneparth

president of Bone Fide Wealth

2. Your investments may falter: Meanwhile, fears that the Fed’s aggressive actions could tip the economy into a recession sent markets tumbling for weeks in a row.

“All asset classes have benefited from this latest liquidity hit over the past two years,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York. Now, “there are more headwinds facing markets than tailwinds.”

In turbulent times, some advisers recommend focusing on high-dividend-paying stocks while sticking to short- and short-term fixed-income assets.

However, Boneparth also advises clients to look for opportunities.

“Good investors must be skilled not only in buying high, but also in buying low,” he said.

During the last recession, “anyone with hindsight would have enjoyed some of the biggest discounts in capital markets,” he said.

3. House price inflation will decline: House prices haven’t exactly fallen, but they’re not rising as fast as they used to and a recession would most likely lead to a slowdown in the housing market as a whole, according to Jacob Channel, senior economist at LendingTree.

Lending standards could also tighten, meaning many potential buyers could find it difficult to get a loan or have to pay a higher interest rate to close the deal. “Overall, that means a recession would make it harder for people to get mortgages and buy homes,” Channel said.

However, it will not be a “2007-2008 style crash”, he added.

The housing market is doing much better than it was in the early 2000s, Channel said. And, even if prices fluctuate, “as long as you stay the course and keep making your payments, you’ll probably end up doing well.”

How to prepare for a recession

While the impact of a recession would be widely felt, each household would experience a setback to a different degree, depending on income, savings and financial situation.

Still, there are a few ways to prepare that are universal, according to Larry Harris, Fred V. Keenan Professor of Finance at the University of Southern California’s Marshall School of Business and former chief economist at Securities and Exchange Commission.

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Here is his advice to consumers:

  • Streamline your expenses. “If they expect to be forced to cut spending, the sooner they do it, the better off they’ll be,” Harris said. That might mean cutting back on a few expenses now that you just want and really don’t need, like subscription services you signed up for during the pandemic. If you don’t use it, lose it.
  • Avoid variable rates. Most credit cards have a variable annual percentage rate, which means there is a direct link to the Fed’s benchmark, so anyone with a balance will see their interest charges increase to every Fed move. Homeowners with variable rate mortgages or home equity lines of credit, which are indexed to the prime rate, will also be affected.

    This makes it a particularly good time to identify outstanding loans and see if refinancing makes sense. “If there’s an opportunity to refinance at a fixed rate, do it now before rates rise further,” Harris said.

  • Hide extra cash in Series I bonds. These federally-backed inflation-protected assets are nearly risk-free and pay an annual rate of 9.62% through October, the highest yield on record.

    While there are purchase limits and you can’t mine the money for at least a year, you’ll get a much better return than a one-year savings account or certificate of deposit, which yields less than 1.5%.

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