There’s much rumbling around the R-word – recession. Will the U.S. economy finally run out of steam after a long stretch of go-go-go?
Experts polled for Bankrate’s Fourth-Quarter Economic Indicator survey said there was a 35% chance that the U.S. economy would enter a downturn by the November 2020 elections. That was lower than the 41% chance estimated during the prior quarter’s survey.
There was a tad of optimism but asked today, the outlook would likely be different.
The China factor
The New Year brought bad news about an outbreak of the novel coronavirus from Wuhan, China. There are now more than 900 deaths and some 40,000 people infected by the virus around the globe. If you think this shouldn’t matter to the U.S. economy, think again. Already global stocks are weakening as coronavirus fears persist.
“The entire world is affected by decreased air travel and slowing trade,” says Barbara Friedberg, who has a degree in economics and MBA and is author of Invest and Beat the Pros: Create and Manage a Successful Investment Portfolio.
Peter Donisanu, chief financial strategist and president of Franklin Madison Advisors says the U.S. economy is already primed for a recession. The virus could be fuel on the fire.
“The closing of borders and increasingly restricted movement of people and goods in other parts of the world could very well aggravate a slowdown in the U.S. It could be harder for U.S. firms to get what they need from suppliers in China. This could slow productive activity and even drive up prices of goods in the U.S.”
Understand too that because China is a global tech industry leader, the ramifications are likely to be huge. Production of smartphones and all manner of high-tech goodies are taking a temporary pause (who knows for how long) or slowed dramatically as workers are told to stay home.
So don’t get miffed if you can’t get your hands on what you want or when prices increase!
Furthermore, worries about the coronavirus could dampen consumer sentiment. “This is important because households tend to reduce spending when they feel less certain about the future. Less spending can weigh on the overall economy, particularly at a time when it’s the consumer that is holding up the bulk of growth,” says Donisanu.
Why the potential for recession is real
Truth is, there’s plenty more than the virus that could mean a drop in the economy over the next 12-18 months. Do not underestimate the potential impact of the presidential election. Uncertainty raises the hair on the back of investors’ necks.
Could the party be winding down?
“We are currently in the longest period of economic expansion in United States history. There have only been three other periods where the economy expanded for more than 8 years, and we are currently approaching 11 years. Strictly from a business cycle standpoint, it would seem that a recession is well overdue. This doesn’t necessarily mean that we will, in fact, run into a recession,” says Spencer Barclayvbvrsuaztfyqwqdavcwsuefvztvu, founder and CEO of Savology, a platform that provides free financial planning online.
He adds that expectations play a larger role in economic conditions than ever before. Political uncertainty, foreign affairs, and public policies are just as likely to cause a recession as a significant change in consumer spending or manufacturing production.
Says Barclay, “The most likely factors to contribute to a recession in the coming two years would be an epidemic with a geopolitical adversary, a health crisis such as a virus outbreak, a hike in interest rates, or a significant increase in tax rates for households or corporations.”
Worried and not ready
So is all this talk about recession just much-a-ado about nothing?
Hardly. It’s top-of-mind for folks, young and old.
Over 50% worried about a recession in the next year
FinanceBuzz surveyed 1,200 Americans and found that 53% are worried about a recession happening within the next year. The survey also found that 41% of participants said that price increases are their biggest concern when it comes to a possible recession, and another 26% are worried about layoffs and job losses during a recession. Of the 1,200 respondents, 56% of those that are ages 25-34 are worried about a recession coming within the next year.
Harvard Business School Online recently surveyed 1,000 working adults to gauge recession-readiness.
“Across the board, people are not prepared, particularly Millennials because the majority have never lived through a recession,” says Patrick Mullane, executive director, who believes a recession is coming.
What were their findings?
Two out of three Millennials aren’t ready, one in three has less than three months of living expenses saved, only half have an updated resume, more than half say their network is moderate to weak and only one in three are actively networking.
Millennials preparing – just in case
While the recession will impact everyone, Millennials could be particularly hit hard. Many are saddled with student loan debt, some are underemployed, others unemployed. They also may not have a deep nest egg to keep them afloat should they lose their jobs.
The big question is, what are they doing with a potential economic storm on the horizon?
Mike Gnitecki – has been saving his money.
“I have a good-sized emergency fund, and I am not concerned about a recession. In a sense, I would welcome a recession, because products would become cheaper. The only downside would be that my stock portfolio would not advance as much,” he says.
John Frigo is not making any drastic moves. He’s a real estate and stock market investor.
“While I get the temptation to take some profits and pull money out, this market could continue to run another 15 or 20% before it pulls back. Assuming you’re young or a millennial you have a long-time horizon to let your money continue to grow and ride out a pullback or recession should one happen. One thing I tell my friends is to check the Fed and if they are still printing money keep investing, once they stop printing money, I might be a little more concerned.”
Frigo is also optimistic that the potential upcoming recession “won’t be as crazy as the last. Job losses won’t be as dramatic, stocks won’t fall as hard, it won’t last as long. While nothing is out of the realm of possibility, I’d say 2008 was likely a once-in-a-lifetime incident.”
Ashley Kirkland, an attorney and business owner of MobileGeneralCounsel.com, is concerned about how the recession will impact her business and family.
“To prepare, I’m developing a plan to get my student loans under control and investing more heavily in the market with my husband. Although we both have student loans, our income allowed us to purchase a house and we’re prepping for our first child! One big change might be that we travel less. We absolutely love traveling and value time outside the country to reconnect. We’re also using tons of savings apps, Qapital, Acorn, and Digit have helped a lot! Overall, we’re prepping for it, just in case, but regardless we want to be more financially healthy and diversify our income streams.”
And for Austin Weyenberg, founder of The Logic of Money:
“I am preparing for a recession by diversifying my investments more and holding more money in cash so that I have a cushion if things do start to fall apart. Everyone should make sure they build up a decent cash pile so that they have something to lean on if the economy starts to go south.”
What experts say you should do
Millennial instincts square with financial experts who offer their advice for prepping for a recession.
Don’t spend frivolously
“Don’t spend frivolously ‘just for the gram’ – It will catch up to you! Try cutting costs where you can and think what you want or need in the long term,” says Jay King, president of Alorica Financial Solutions.
Be as liquid as you can be
What does that mean?
“Make sure you have enough money in the bank to cover at least three to six months’ worth of living expenses. You do not want to have a higher credit limit than cash savings in your bank during an economic decline. You do not want to have all of your money tied into a retirement account and have nothing to fall on when a crisis hit,” says Anthony Copeman, a certified financial education instructor.
When you withdraw money from a retirement account, you’ll be hit with other crises – taxes and fees, and less money for your future self. “When you prepare for an economic downturn, always think about readiness over a recession because you should save for freedom, never out of fear,” Copeman says.
Debt, streams of income, and the market
There are three key things Barbara Friedberg suggests you do:
“Pay off credit card and non-secured debt, create multiple streams of income and do not sell stocks, bonds, or funds after a market drop. Use the decline as an opportunity to buy more.”
Build up your credit scores
One last tip comes from Sean Messier, a credit industry analyst:
“Build your credit scores as high as possible. Interest rates tend to rise when the economy’s in a rut, so maximizing your credit scores is important if you think you may need to borrow money during the recession. Higher credit scores can make it easier to be approved for credit cards and loans with more desirable terms. Plus, credit can impact your ability to rent housing, especially in competitive markets. If you’re looking for an apartment during the recession and your credit is less than stellar, you may find it more difficult to secure a lease on nicer properties.”
Nobody knows for sure if and when a recession might occur. Any smart money move you make will serve you well.
The best thing you can do is be prepared, just in case.