By almost every measure, the US economy has made a stunning recovery after the coronavirus pandemic led to massive shutdowns and layoffs across the country.
The labor market has again added millions of jobs and wages have risen significantly, even among lower-paying positions.
But with rising inflation and rapidly rising interest rates, most Americans fear that the good times will be short-lived.
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“Are we going to have a recession? It’s pretty likely,” said Larry Harris, the Fred V. Keenan Chair in Finance at the University of Southern California Marshall School of Business and former SEC chief economist.
“It’s very hard to stop inflation without a recession.”
To contain the recent inflation spike, the Federal Reserve has indicated that it will continue to raise interest rates.
When rates are high, consumers get a better return on the money they have in a bank account and have to spend more to get a loan, which can prompt them to borrow less.
“Rising interest rates are stifling spending by increasing borrowing costs,” Harris said.
There will be a day of reckoning, the question is how soon.
Larry Harris
former chief economist of the SEC
As a result, less money flows through the economy and growth begins to slow down.
Fears that the Fed’s aggressive moves could plunge the economy into recession has sent markets plummeting for weeks in a row.
The war in Ukraine, which has contributed to rising fuel prices, labor shortages and a new wave of Covid infections, poses additional challenges, Harris said.
“Huge things have happened in the economy and huge government spending,” he said. “When balances get big, adjustments have to be big.
“There will be a day of reckoning, the question is how soon.”
The last recession happened in 2020, which was also the first recession some younger millennials and Gen Zers had ever experienced.
But recessions are actually quite common, and before Covid there were 13 since the Great Depression, each marked by a significant decline in economic activity that lasted for several months, according to data from the National Bureau of Economic Research.
Prepare for budgets to come under pressure, Harris said. For the average consumer, this means “they eat out less often, they replace things less often, they don’t travel as much, they squat down, they buy hamburgers instead of steak.”
While the impact of a recession will be widely felt, each household will experience such a downturn to a different degree depending on their income, savings and financial capacity.
Still, there are a few ways to prepare that are universal, Harris said.
- Streamline your expenses. “If they expect they’ll be forced to cut spending, the sooner they do it, the better off they’ll be,” Harris said. That could mean cutting a few expenses you just want and really don’t need, like the 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 rate, meaning there’s a direct connection to the Fed’s benchmark, so anyone who carries a balance will see their interest charges rise with every move of the Fed. Homeowners with adjustable-rate mortgages or equity lines of credit, which are tied to the prime rate, will also be affected.
That makes this a particularly good time to identify the outstanding loans and see if refinancing makes sense. “If there is an opportunity to refinance to a fixed rate, do it now before interest rates rise further,” Harris said. - Store extra money in I-bonds. These federally-backed inflation-protected assets are nearly risk-free, paying 9.62% yoy through October, their highest-ever return.
Although there are purchase limits and you can’t tap the money for at least a year, you score a much better return than a savings account or a one-year certificate of deposit, which pays out less than 1.5%.
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