On Aug. 14, the market went into a panic when the yield curve inverted for the first time in many years. The market reacted because such an inversion has signaled the next recession in past economic cycles. The current economic expansion having begun more than 10 years ago also increases the odds of a downturn — since World War II, the average economic expansion has lasted 58.4 months. Although nobody can say for sure when the next recession will occur, understanding the cause of a recession and how to minimize its effects on your family budget can go a long way toward maintaining your financial stability.
- Internal Factors That Influence Recessions
- External Factors
- How a U.S. Recession Could Affect the Rest of the World
- Key Indicators of a U.S. Recession
- Indicators of a Short-Term Recession — or No Recession at All
- Surviving the Next Recession
- Looking Ahead
The question on the minds of many is, “Are we headed for a recession?” A GOBankingRates survey found that 44% of respondents believe a recession is coming within six to 12 months. Although we cannot yet answer that question, we know that many factors go into such a downturn.
Policy can have a significant effect on the performance of the economy, and perhaps no policy has inspired more discussion than trade — specifically, the U.S.-China trade war. Tariffs increase the price of imported goods, often harming a country and its businesses. To the U.S. consumer, the tariff has the practical effect of a tax on imported goods. With imports costing more, economic activity falls, sometimes to recessionary levels.
Lower interest rates from the Fed, less taxation and fewer regulations are factors that can increase economic activity.
Many credit President Donald Trump’s 2017 Tax Cuts and Jobs Act with expanding the length of the economic cycle. Trump also vowed to cut regulation, but most credit him with slowing regulation growth rather than slashing it. Democrats argue that such cuts benefit big business at the expense of the American consumer.
President Donald Trump
Since Trump became president, the market has often moved up or down based on his tweets. Trump correctly insists there is no recession, but at the G7 summit, he appeared to give mixed signals when he expressed regret for escalating the ongoing U.S.-China trade war — a comment on which aides backpedaled. Although he cut interest rates, many fear Trump’s hawkish view on trade could trigger a downturn.
…the Economy, where there is NO Recession, much to the regret of the LameStream Media! They are working overtime to help the Democrats win in 2020, but that will NEVER HAPPEN, Americans are too smart!
— Donald J. Trump (@realDonaldTrump) September 9, 2019
Although growth in the U.S. economy continues, many other countries either face recessions or might soon log the two consecutive quarters needed to make a downturn official.
The State of Some Global Economies
In Europe, both the U.K. and Germany saw a quarter of negative growth, and Italy, with its massive debt load, has been in a recession since last year. Latin America also faces problems. Argentina’s peso has fallen, and the country could be headed toward a currency crisis. Brazil and Mexico both saw growth contract in the previous quarter. And in Asia, South Korea teeters between negative and positive growth.
The next recession has not hit the U.S. — at least not yet. Although many analysts once believed that “when the U.S. sneezes, the rest of the world catches a cold,” emerging economies, particularly in Asia, have arguably reduced U.S. influence. That said, the U.S. remains the world’s largest economy. China might someday eclipse the U.S., but for now, it and other countries depend heavily on the U.S. consumer. Hence, a U.S. downturn likely holds serious repercussions for the world.
Although indicators cannot answer the question, “When is the next recession?” several factors can give an indication.
Inverted Yield Curve
A yield curve inversion happens when the rate of the two-year Treasury bond exceeds that of the 10-year Treasury. In layman’s terms, this means you will earn more interest by investing for the short term than over the long haul.
This indicator has predicted every recession since 1956. Still, investors should note that this signal does not indicate the timing for a downturn. The inversion that preceded the 2007-09 recession occurred two years before, in 2005. But with the likelihood of a recession coming at some point, investors should prepare.
Most Economists Predict a Recession
According to the National Association for Business Economists, or NABE, more than three out of four economists predict a recession by 2021. Most cite the U.S.’s limited ability to withstand a trade war as one of the main reasons.
Megan Greene, a Senior Fellow at Harvard’s Kennedy School of Government and the Chair of the NABE survey, believes the stimulus from the tax cut has “petered out.” She also thinks we have entered a “manufacturing recession,” but she believes the growth in the first half of 2019 makes a recession unlikely this year, and she does not predict a 2020 recession. “I’d say the probability goes up to 2021,” she said.
David Rosenberg, chief economist of Gluskin Sheff, sees a drawing down of savings leading to a recession. “The reality is that income was up only 2.5%, which isn’t terrible, but it shows you the extent [to] which consumption growth has outpaced real income growth.” Rosenberg also sees what he calls a “capital spending-led” recession due to a slowdown in business spending.
Other indicators point to continued economic strength. This leads some economists to believe that a recession is not forthcoming.
In harder times, employers tend to shed jobs to save money. With the current unemployment rate of 3.7%, this has not occurred yet.
The economy depends heavily on consumer spending. If that slows, it might be reasonable to assume that the next recession will likely follow. But with consumer spending growing at 0.6%, this metric does not point to a downturn.
Some Economists Predict No Recession
Not everyone sees a recession coming. Many signs point to the economy still exhibiting robust growth. As of August, unemployment stands near record lows, and consumer spending remains strong, with September’s growth outpacing the 0.3% gain in June.
Jeremy Siegel of the Wharton School of Business has emerged as one who does not see a recession. He believes the Fed “has enough silver bullets” to fight a downturn. He also calls the decline of real interest rates “one of the big phenomena” of the last 10 years. “The Fed’s rate is way too high,” said Siegel.
Optimism aside, given the inverted yield curve and unprecedented length of the expansion, most would consider it prudent to prepare for a recession — or, in the event you find yourself out of work, an outright “depression,” as has been the case for many once-prosperous individuals. Such an occurrence could hurt a lot of people. In fact, a GOBankingRates survey found that 37.62% of respondents had done nothing to prepare for such a downturn.
People react to recessions in a variety of ways, and some actions certainly help more than others. Use these recession survival tips to lessen the impact of the next recession should you lose either your primary or secondary sources of income.
Build and Live Within a Budget
Perhaps the most potent tool to fight a recession is knowing what you spend in the first place. For this process, budgeting becomes critical. First and foremost, budgeting brings control of what you spend. This gives you the knowledge needed to track spending. It will also help prevent overspending on unnecessary things such as vacations or lattes at a critical time. Moreover, it allows you to build savings — savings that will come in handy should your income fall.
You can take this a step further by creating an “emergency budget.” This will help you direct spending to only the most critical items should a loss in income occur.
Minimize Debt When Possible
Surviving during a recession can be difficult enough with your current bills. Having debt left over from past spending makes coping with a downturn all the more challenging. Next to getting on a budget, eliminating debt as much as possible is arguably the most crucial step. With fewer bills, you’ll increase the chances of getting through a recession without worsening your family’s financial setbacks. Many Americans have heeded this lesson. A GOBankingRates survey found that to prepare for a recession, 26.85% of respondents paid off most of their debt, and another 32.14% avoided taking on debt.
Maximize the Value to Your Employer
Even at the height of the Great Depression, with 25% unemployment, 75% still held a job. But a recessionary environment forces companies to consider the value added by employees. This makes it all the more critical that you create more value in work than you cost in terms of salary. Instead of allowing yourself to become the employee your company can’t afford, become the worker they can’t afford to lose.
Build an Emergency Fund
Even if you hold onto your job, unexpected expenses or loss of income sources can still affect you. Here, building an emergency fund becomes critical should you end up with an unexpected trip to the hospital, have a repair bill or sustain damage to your home. It can also fill in gaps should you find yourself out of work for a while.
Consider a Career Change
Not all workers suffer during hard economic times. Demand in some parts of the economy remains consistent at all phases of the economic cycle. Workers often turn to jobs in healthcare, education and government for this reason. Many wait for a job loss for such a move, as they presumably will have more time for training. By preparing now, you’ll be likely to make the transition without a period of unemployment.
Build and Maintain Your Credit Score
Good economic times can often make borrowers sloppy. With ample money available for payments, they can borrow recklessly, not caring about the interest rate or even missing payments. But this could destroy your credit score, leaving you unable to borrow at reasonable rates — or at all — during harder times.
Rebalance Your Portfolios
A coming recession makes for a good time to exit high-risk investments. The most overvalued stocks often take the hardest hit during such times. By exiting before the downturn hits, you can have the cash to buy back those stocks or purchase something else, likely at a much lower price.
This should not include your retirement fund, as most of those are designed to ride out downturns. Moreover, you should remain on the hunt for buying opportunities. As stock prices fall, your money will buy more shares.
Adjust Income Tax Withholding
You often hear the excess withholding from your paycheck called an “interest-free loan to Uncle Sam.” Figures have come down from previous years, but the government still issued 95.7 million tax refunds amounting to an average of $2,725. Although you might miss the windfall in more prosperous years, socking away the extra take-home pay in your regular paychecks would be a huge help in times of a job loss.
To adjust the money given to the government, fill out a new W-4 form.
Consider Buying Instead of Renting
Although the benefit of such a move depends on where you live, consider purchasing a home. One of the few upsides of a recession is that it can increase home affordability. Housing prices fell by 33% on average during the last downturn, only to rebound 50% by 2018. In this case, not only will you lower housing costs, you’ll likely have an asset that increases in value over time, once the economy recovers.
Review Insurance Coverage
In this case, the “risk mitigation” aspect of insurance becomes essential. Most of us hold policies with health, life, auto, homeowners and other types of insurance. We often buy these policies without considering the chances we will use the insurance.
This leaves ample opportunity to seek out lower premiums. For example, if you’re young and unlikely to end up in the hospital, consider a policy with a lower premium and a higher deductible. Of course, consider other strategies to save money if the long-term risk of changing your policies outweighs the short-term benefits.
Consider Secondary Income Sources
Assuming you have time available, a side hustle could go a long way in mitigating the adverse effects of a recession. While times are good, it can provide the funds needed to build savings or provide extra income. When times are bad — say if you lose your primary job — it ensures you still have some income.
Understand Unemployment Benefits
Rules vary by state, but laid-off workers can receive limited benefits for a time while they seek their next position. This could provide critical help at a time of income loss.
Workers should keep in mind that benefits are taxed, and a secondary job could reduce or even wipe out unemployment benefits. On the other hand, a side hustle can delay the time before your defined benefit runs out.
The inverted yield curve points to an upcoming recession. Opinions differ on when and whether that downturn will occur, but after the inverted yield curve and more than 10 years of growth, Americans should assume a recession will come sooner rather than later.
It never hurts to prepare for such an occurrence. Preparation will not necessarily prevent economic downturns and job losses. Still, by taking control of your finances, increasing your value in the marketplace and cutting unnecessary expenses, you can better withstand a downturn — and maybe, with a little bit of planning, even turn the recession to your advantage.
More From GOBankingRates
Will Healy is a freelance financial and political writer based in the Dallas area. He holds degrees in journalism and business and has covered a variety of topics, such as stocks, real estate, insurance, personal finance, politics and macroeconomics.
Last updated: Sept. 23, 2019