Will It Be a Recession or Just a ‘Richcession’?
While economists and investors have been pondering whether the country might enter a recession in 2023, some believe that if it happens, it will be mostly confined to one segment of the population: the rich and higher-income class.
There has even been a term coined by The Wall Street Journal to describe it, the “richcession.”
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While recessions typically affect the broader population and lower- and middle-class workers are usually the ones taking the brunt of it, this potential one might be different, partly due to the massive tech layoffs, where salaries are generally higher than in other industries.
Indeed, so far in 2023, there have been 359 tech companies with layoffs, and a total of 105,010 layoffs as of Feb. 15, according to layoffs.fyi.
And while it’s hard to predict which other sectors might take a downturn, many experts say layoffs will mostly continue to happen in the tech space.
Where Will the Layoffs Be?
“I fully expect more layoffs to keep impacting tech for the next several months,” said Stephen Smith, vice president of commercial operations at DailyPay, adding that particularly as we’ve learned about the excessive management layers at places such as Meta.
“There is still more trimming to do in many tech companies — that part isn’t over. We’ve seen layoffs in other sectors — such as financial services and retail — but not nearly to the extent we have in tech,” Smith said. “Those other organizations are trimming a bit as earnings come down in a slowing economy, but they didn’t over-hire like the tech industry did, nor did they massively overpay for some roles like Google did.”
In turn, he said, largely because of the over-hiring in the space since 2019, this “feels much more like a ‘techcession’ than a “richcession.”
While inflation is impacting Americans across the board — the rising price of energy and food impacts everyone — this downturn may be different for rich people in that while the jobs are there, they may have a hard time matching the salaries they earned in tech, especially if they have gone remote and are away from expensive places such as San Francisco, New York or Los Angeles.
“There were 11 million job openings in the U.S. as of the end of January, but it feels like it may be the start of a salary re-adjustment period for many people who will have to find jobs outside of tech,” Smith said.
And while soaring prices make it harder for average Americans, even rich people are focused more on austerity now, he said.
“The rich are still traveling, going out and spending — but they are being more selective,” he said.
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How Other Income Brackets Might Be Impacted
Yet, a potential recession will also affect Americans in other income brackets, and some experts argue that there is no way to predict how it could ultimately impact different industries.
“That said, it is rare that any economic trend will stay isolated simply because so many industries are dependent on each other. Remember, high earners spend money — including discretionary money. If they have less to spend, that can impact sectors, like luxury, that depend on that wealth,” said Bobbi Rebell, CFP, founder of Financial Wellness Strategies and author of “Launching Financial Grownups.”
Rebell said that every economic cycle has unique factors that will impact different sectors, but it is often not clear until economists can look back and analyze so it is important not to jump to conclusions.
“Remember that when COVID-19 began there was so much concern about how damaging it would be to the economy. In the end, because of unpredictable things such as government programs and lower spending, COVID-19 had a very different economic impact than many predicted,” she said.
And let’s not forget that the middle class is already facing dwindling savings and credit borrowing is skyrocketing.
“There’s a limit to how much debt people will be able to take on and at some point it will hit a wall. People will have to cut back on their spending in big ways and dial back plans,” Smith said.
In addition, while the Federal Reserve — and everyone else — is hoping for a soft landing scenario, given its promise to keep interest rates higher for longer, there is a risk of materially higher unemployment as a result, said Tracy Bell, CFA director of equity strategies at First Horizon Advisors.
“Middle-income Americans often lack the savings and financial stability of higher net worth Americans, so a job loss can set off a chain of events that makes financial recovery more difficult,” Bell said.
One thing that’s to the advantage of middle-income Americans however, is that right now many companies that employ middle-income workers are still looking to hire.
“For workers that lose jobs, they may be able to replace that income more easily than in past recessions because there is strong demand for their skills,” Rebell said. “That said, it would be presumptive to assume that middle-income workers won’t be impacted because as we learned during the peak of the COVID-19 pandemic, there are so many different factors that impact hiring trends — many of which are not in the workers’ control.”
The Future and How To Plan For It
Yet, there are silver linings. According to several experts such as Smith, if the Federal Reserve can manage a soft landing, there will be a turnaround in the economy in the fourth quarter of this year.
“Things will be slow and tight until then — but unless a black swan event happens (such as a massive expansion of the Ukraine War) — I think we’re going to muddle through it and it will be much more of a techcession than anything else,” Smith said.
Finally, for workers concerned about a recession, Rebell suggests that they should try to focus on their overall financial wellness so that they are in both a good financial and mental state should something happen.
“If a layoff is coming to their company, they often can’t control their fate there. But they can control how well prepared they are, and what steps they take to set themselves up for success in their next venture,” she said.
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