RALEIGH – The United States economy has now been in negative territory for two consecutive quarters, the traditional definition of a recession, so now is the time to reconsider your household budget to weather any personal economic impact.
Recession or not? The data disagree
The U.S. economy shrank, again, in the latest quarter, according to the most recent report from the Bureau of Economic Analysis. But that doesn’t necessarily mean that the national economy has slipped into a recession, though many analysts understand a recession as having occurred when there are two consecutive quarters of economic growth as measured by gross domestic product, or GDP.
“The fact that the economy has contracted for two quarters doesn’t mean we are in a recession,” said Dr. Gerald Cohen, chief economist at the Kenan Institute. “We have super strong job growth and consumer spending is still healthy.”
That’s why we may not be in a recession, Cohen notes. But should that change, and job growth either slows meaningfully or declines, the official designation of whether the economy is in a recession from the National Bureau of Economic Research (NBER) may soon follow.
And while Cohen, along with others, have shared the advice below on how to prepare for a recession, he also notes that individuals who cut back on spending, for instance, may actually also contribute to the likelihood a recession does occur.
“If we are not in a recession and everybody heeds the advice, then it could likely cause a recession,” Cohen said.
Fayetteville State University economics professor Dr. Petur Jonsson said the Federal Reserve could consider another rate hike. On Wednesday, the Federal Reserve raised its benchmark interest rate by three-quarters of a point for a second straight time.
“It was literally inevitable,” Jonsson said of inflation. “Now the government, through its emergency-spending program,s surely exacerbated it, the roots are much deeper than that.”
Jonsson explained what Americans can do to protect themselves as the cost for just about everything skyrockets.
“Don’t buy bonds. Try to invest in something real,” Jonsson said. “I think one of the really fantastic options that a lot of people are not aware of is buying inflation index bonds from the [U.S.] Treasury.”
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Secure your job situation
The first tip from Cohen is to “shore up your job situation.”
Here’s why: Taking steps now to ensure you won’t be affected by layoffs, job cuts or a slowdown in hiring will buffer you against economic shock that could come from being out of work, if you rely on employment to generate income.
“If you are looking, be less choosy and take a job,” said Cohen. “It will be much easier to find a job now than in the midst of a recession.
One action step that you might take, according to Dr. Michael Walden, a Reynolds Distinguished Professor Emeritus at North Carolina State University, is to talk to managers at your company to gain a better understanding of whether the company may be considering a staffing reduction. That could help you assess “how vulnerable your job is to a reduction in work hours or, at the worst, to total elimination,” said Walden.
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Prepare your personal finances
Another step that anyone can take, even with rising prices and soaring inflation, is to take a look at your personal finances; consider everything from income and spending to retirement and investments.
Cohen advises that those concerned about a coming recession may wish to put away a little extra money each month.
“Make sure you have a rainy day fund if you lose your job, hours are cut or wages are cut,” said Cohen, adding, though, that if everyone were to stop spending on consumer goods and services, that might actually cause a recession.
If you’re looking to cut spending without feeling restricted, perhaps consider swapping or substituting some items for less expensive alternatives, said Cohen.
Walden suggests that those concerned that a recession may be coming could construct or reconsider the household budget, identifying items that could be cut back to cover any lost income.
But Walden also notes that people can also benefit from looking back at the choices they made during the last period of economic recession and during the first few months of the pandemic.
“Review how you earned money during the shutdowns of the pandemic and evaluate if those options are still viable now in the event additional earnings are needed.”
Don’t make major changes
While tweaking your household budget or finding ways to increase your rainy day fund can help you prepare for when a recession comes, you don’t need to make any major changes.
For example, you may wish to review any short-term plans that you had, especially for big ticket items like buying a new house, a new or used car or taking an expensive vacation.
“Consider putting those plans aside for the next year to 18 months,” said Walden. Still, though, when you revisit your personal finances, resist the urge to make major changes to your investment portfolio.
“People make bad investment decisions when they are nervous,” said Cohen. “The most successful long-term investors sit on their hands and don’t sell into down markets.”
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Stay the course
Stay the course, said Cohen.
That’s especially important, said Walden, for those who are relatively young, meaning those at least 10 years away from retirement.
“Don’t make any quick, drastic changes to your investment portfolio,” said Walden. “While there will be more losses ahead, selling now would lock in losses that have already occurred.”
But it is still advantageous to review your investments to understand their current asset allocation, said Cohen.
“Make sure your asset allocation fits your time horizon,” said Cohen. “If you are nearing retirement and will need the money in a relatively short time, then you should have a much smaller allocation in equities than someone who is starting their career.”
WRAL Fayetteville reporter Gilbert Baez contributed to this story.
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