A recession is at the doorstep. Here's why it may not be as bad as you might think
There’s an old yarn that goes something like this: If your neighbor loses her job, it’s a recession. But if you lose yours, it’s a depression.”
It’s a pithy saying that has nicely described the historical connection between economic slowdowns and job losses. But it may not have relevance this time around.
After two straight negative quarters, the economy now has entered what many observers consider recession territory. But will you suffer financially as a result? Not necessarily, as recessions help to ease inflationary pressures and other imbalances, laying the seeds for future growth.
This recession could have a different feel anyway, with Americans’ attitudes about employment shifting. Few people welcome economic downturns, but there are a few potential silver linings:
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Job losses might not be severe
Many Americans don’t seem especially concerned about their employment prospects, even though recession clouds have built for months. There are still more than 11 million unfilled jobs out there, and employers still want to fill openings.
The Conference Board research group recently surveyed people who quit their jobs over the past year. A resounding 94% of respondents in the late-June poll said they didn’t regret leaving. A July poll by employment firm Robert Half found that 67% of workers were still confident about their job prospects for the coming year.
Right before the recession that began in December 2007, the nation’s unemployment rate stood at 4.7%. Today, it’s several notches lower, at 3.6%. Plus, there are a lot more baby boomers retired or retiring today, with little indication that most want — or need — to return to the workforce.
“Despite worries of a recession — and the hiring slowdown and layoffs that often result from a downturn — the labor market remains strong,” said Rebecca Ray, an executive vice president at the Conference Board, though she noted that a slowdown "makes the decision to jump ship riskier.”
The bottom line: Unemployment will climb during a recession, and so will layoffs. But coming off today’s low jobless levels, at a time when millions of Americans don’t want or need to work, we may see less than the usual amount of hand-wringing.
Money will keep flowing in
If job-related anxiety isn't so acute, that might reflect the realization that most people don't view their incomes as threatened.
For example, retirees on Social Security will continue to receive benefits, recession or not. In fact, the next COLA or cost-of-living adjustment for 2023 could be near 10%, owing to high inflation over the past several months.
Most people don’t have access to or qualify for private pensions. But those who do generally can expect their payments to continue. Few pension systems have reported stresses of late. In fact, higher interest rates, with rising interest income flowing in on their bond holdings, will help pension plans meet funding obligations.
Even for people who rely on paychecks, a recession might not touch their pocketbooks all that much. The vast majority of workers will remain employed, as they always do in recessions, though employers might crimp benefits and pay raises here and there.
"Despite inflation and everything else, the average person is still able to work and shop," said Brad McMillan, chief investment officer at Commonwealth Financial Network.
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Prices will stabilize and possibly drop
A recession also would likely put a damper on inflation. This is, after all, the main objective of recent Federal Reserve interest-rate hikes. There already are signs of improvement. Among them: Average gasoline prices dropped 14% over the six weeks through July 22, reported the U.S. Energy Information Administration, and crude oil prices were down more than 20%.
The prices for many types of foods, metals, and other commodities also have retreated a bit, and retailers are starting to report bloated inventories, which could lead to consumer-friendly discounts ahead. Also, shoppers are getting more price sensitive, according to some reports.
The inflation story this time could be different, and more complicated, given supply chain constraints, pandemic disruptions, and government policies to address the health crisis. But a slowing economy should provide some relief for inflation-weary consumers.
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Asset prices will fall, then rebound
The stock market already has taken it on the chin, even before the economic numbers were reversing. Investors and traders tend to be forward-looking, and recession fears helped trigger a roughly 20% slide in the Standard & Poor’s 500 index during the first half of 2022, as investors anticipated that activity was cooling.
Have prices bottomed for this cycle? Nobody knows. Even so, stock prices invariably make up more ground following recessions than they lose — usually, a lot more. And they start advancing before the storm clouds lift.
Home prices might start dropping next, under the pressure of higher interest rates and probable job losses that will make it tougher for some potential buyers to qualify. Home-sale and mortgage activity already are slowing.
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Still, few prognosticators are calling for a severe home-price slump as happened during the 2007-2009 downturn, focused as that was around housing and buyer-qualification issues. Plus, housing supplies in many markets still haven't caught up to demand.
At any rate, lower housing prices would be welcomed by the roughly one in three households on the sidelines, making it easier for some of them to purchase. Rising mortgage rates aren't helping, but homeowners can refinance loans later, when and if rates ease.
Consumers should prepare, anyway
Technically, the economy hasn’t yet slid into a recession. That won’t come until the National Bureau of Economic Research makes an official pronouncement, possibly months down the road. The bureau doesn't focus solely on the two-down-quarters rule of thumb, considering many additional other factors.
Regardless, now is one of those times when people should try to make sure they’re in good shape. Suggestions offered by Michele Raneri, a vice president at credit bureau TransUnion, include paying down credit card and other debt, consolidating different card balances onto a single lower-rate card if possible, and building up an emergency fund to meet a job loss or other big expenses.
A fund with enough cash to meet three to six months of expenses is a good rule of thumb, she said, "But even a much smaller amount — a few hundred dollars — can make a big difference if emergencies occur."
One underappreciated aspect of recessions is that they redistribute resources from less-productive businesses and industries to more productive ones, which creates opportunities for advancement, noted Tom Giovanetti, president of the Institute for Policy Innovation. So if you lose a job at a weak employer in a struggling industry, consider the possibility to move onward and upward.
“Many of those (laid-off) employees are going to be better off and more productive in their new place,” he said.
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