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Copyright 2018 Associated Press. All rights reserved. Is a recession just around the corner?
While U.S. consumers are still recovering from months of price inflation on most goods and services, another economic challenge could be lurking around the corner: recession.
Experts and financial institutions are seeing signs that we are headed toward recession, perhaps in just a few months. Billionaire banker Jamie Dimon estimates that the US will enter a recession by the middle of next year. Europe is already in recession and we will probably be there within six to eight months.
Fed Vice Chair Lael Brainard cites several reasons why she believes we are heading toward recession, including rapid interest rate hikes by central banks around the world in efforts to curb inflation. Brainard also noted that there is evidence that most American households have less financial protection than previously estimated. This means they are likely to spend less, slowing recovery from a recession.
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The International Monetary Fund recently cut its global growth forecast for 2023 amid conflicting pressures from the war in Ukraine, high energy and food prices, inflation and sharply higher interest rates, warning that conditions could worsen significantly next year.
The Federal Reserve and other central banks have been sharply raising interest rates to try to curb inflation — a delicate balancing act. The IMF said raising interest rates too quickly could tip the global economy into an “unnecessarily severe recession” and cause disruptions in financial markets and suffering for developing countries. Still, the IMF said, it was more important to control inflation.
A recent probability model run by Ned Davis Research put the chance of a global recession at 98.1%. The recession model has previously only been this high during severe economic crises, including during the global financial crisis of 2008 and 2009.
If the experts are right, what can you do to prepare for a recession and get through it with as little financial loss as possible? Here are some important steps to take now:
Start saving money in an emergency fund. You need to have a cushion of three to six months of income. With interest rates on the rise, look into short-term CDs or savings accounts.
Pay your debts. Paying off your credit will free up money in the future. The Fed has been raising interest rates and that means you are paying more for your debt.
Increase your credit limits or apply for a home equity loan (just in case). Understand that this money should not be used except as a last resort.
Make an appointment with your financial advisor. Discuss your investment portfolio, risk level and goals. Reallocate your assets if you are concerned. Meet with your financial advisor and establish a financial plan for the coming year.
Hold tight, but stay informed. Investing is a long-term process that requires patience and a willingness not to let emotions dictate investment decisions. Keep some money on the sidelines and don't rush to buy when the market corrects – no chasing after a falling knife. Wait until there are signs of global market stability before putting more money to work through investments.
Keep your retirement savings on track. Continue to invest if you have several years before retirement, but you should probably talk to your advisor to see if you need to rebalance your plan.
Add it to your income if possible. Market corrections translate into long-term investment opportunities, but you can't invest more if you don't have the money to do so. Working overtime or freelance work are just some of the ways you can earn more money to invest. Review and update your LinkedIn profile and resume, and collect endorsements from those you work with.
Reduce your spending and make sure your budget is up to date. We offer free budget spreadsheets to download on our website.
If you're close to retirement, you might want to work a few more years to add to your retirement accounts. As interest rates rise, tools like bonds can turn a retirement account into a regular stream of income, mimicking a paycheck.
Talk to your children about the household budget. Get everyone on the same page and use this opportunity to teach your kids about money.
