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WallStreet is predicting a looming 2023 recession. But here is how to prepare for it

by Deladem Kumordzie 8 months ago in advice
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According to Forbes, What the Wall Street Journal really asked was what is the probability that the U.S. economy will be in recession in the next 12 months. The average response was 28% probability that we’ll be in a recession anytime in the next 12 months.

According to CNN Business New York. “Bank of America also warned that high inflation poses a credible threat to the economic recovery that began just two years ago. Inflation shock’ worsening, ‘rate shock’ just beginning, ‘recession shock’ coming,” Bank of America chief investment strategist Michael Hartnett wrote in a note to clients on Friday.

The warning came ahead of a new government report on Tuesday that showed consumer prices surged by 8.5% in March, the fastest pace since December 1981. There were records of price hikes on everything from new vehicles and men’s apparel to baby food and salad dressing.” Says CNN Business New York.

Inflation is “out of control,” Hartnett wrote, adding: “Inflation causes recessions.”

But with all these news reports, what is a recession to a generation that has not experienced it before? and how do we prepare for it?

A look at what recession is

A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Simply put, “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” — The National Bureau of Economic Research

It is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession. Recessions are considered an unavoidable part of the business cycle — or the regular cadence of expansion and contraction that occurs in a nation’s economy.

In 1974, economist Julius Shiskin came up with a way to define a recession as a general rule of thumb. Think of it this way, over time, an economy’s GDP declines, At this point expansion is eminent. Every healthy economy has to expand to make way for more growth. However, If for two quarters in a row there are contracting outputs ( decline in trade and industrial activity ) it suggests there are serious underlying problems. That is where a recession comes into play.

Fun Fact

Recessions are really “depressions,” but the term “depression” seems too terrifying and has a worse impact. After the Great Depression, economists began to use the word “recession” instead.

Recessions and depressions have similar causes, but the overall impact of depression is much, much worse. There are greater job losses, higher unemployment, and steeper declines in GDP. Most of all, depression lasts longer — years, not months — and it takes more time for the economy to recover.

What Causes a recession

There is more than one way for a recession to get started, from a sudden economic shock to fallout from uncontrolled inflation. Here are some of the main drivers of a recession:

Economic shocks — An unpredictable event that causes widespread economic disruption, such as a natural disaster or a terrorist attack. The latest example is the recent COVID-19 outbreak.

Loss of consumer confidence. When consumers worry about the state of the economy, they slow their spending and keep whatever money they can. Because close to 70% of GDP depends on consumer spending, the entire economy can drastically slow.

Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind. Investors can become too optimistic during a strong economy. Former Fed Chair Alan Greenspan famously referred to this tendency as “irrational exuberance,” in describing the outsized gains in the stock market in the late 1990s. Irrational exuberance inflates stock market or real estate bubbles — and when the bubbles pop, panic selling can crash the market, causing a recession.

Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. High-interest rates make it expensive for consumers to buy houses, cars, and other large purchases. Companies reduce their spending and growth plans because the cost of financing is too high. The economy shrinks. Out-of-control inflation was an ongoing problem in the U.S. in the 1970s. To break the cycle, the Federal Reserve rapidly raised interest rates, which caused a recession.

Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets out of hand, people and businesses stop spending, which undermines the economy.

What happens during a recession and how does it affect me

During a recession, the economy struggles, there is a loss of jobs, companies make fewer sales, and the country’s overall economic output declines. That being said, there are indicators of looming trouble. The following warning signs can give you more time to figure out how to prepare for a recession before it happens:

Yield curve: The 3-month Treasury rate topped the 10-year yield on March 22 for the first time since 2007, but it soon recovered. Now, however, the curve is inverted again, with the spread 32-basis-points wide.

One of the most closely watched indicators of an impending recession is the “yield curve.”

A yield is simply the interest rate on a bond or Treasury. These Treasuries have differing lengths of duration, known as their maturity. Some bonds last one month; some last 30 years. The curve, therefore, compares how those interest rates change over time.

When the yield curve inverts, however, the curve becomes downward sloping. This inversion means investors are demanding a higher yield for Treasuries of shorter durations. In this case, they think it’s riskier to hold their bond over the shorter term.

Traders, economists, and strategists alike watch this curve because it has a particular track record for preceding downturns.

How to prepare for a recession

Build a substantial emergency fund: Assembling six months’ worth of expenses can seem like a daunting task but don’t underestimate the power of small contributions. Regularly adding to your savings account over time can build a crucial savings habit. Better yet, automate your contributions to put the process on autopilot.

Identify ways to cut back and take charge of your expenses: You might have heard financial gurus say that it does not matter how much you make, it’s how much you save or invest that truly determines your financial projection. If you earn a lot of money but your expenses have spiraled out of control, you will always be experiencing financial problems. You need to have a budget for every pound, euro, or dollar you make. Figure out how much your household spends in a month.

Try to see if there are unnecessary expenses that you can get rid of.

The six-month savings rule: If you try the six-months savings rule, you will have the peace of mind that you need to weather any kind of financial crisis. This simply means that you need to save enough money to last six months without an income. Calculate how much you spend to run your home in a month and multiply that amount by six. That is the figure you need to have in your bank if you want to maintain the same lifestyle you have for at least six months.

Be ready for a pay cut, or unemployment: Recessions can render you jobless, but if you plan well you can cushion yourself from the situation. So It may not come as a surprise if your boss tells you they want to reduce your pay/hours or even ask you to leave. You need to be mentally prepared for such an eventuality. If you are, you will be able to control the money you have now better so that it can push you further as you look for greener pastures.

Look for new money-making opportunities: Look for income streams that can add a few bucks. For instance, seek freelance writing gigs that might add some cash to your pocket. There are many opportunities you can explore online from the comfort of your home

Bottom Line: DO NOT PANIC

If we survived the pandemic, we can survive this too. We have the chance and time to plan ahead. Predicting a recession is guesswork but the numbers do not lie, so if you ask me, it will be unwise not to prepare and then be struck with surprise when it catches up with you.

So what do you say?


About the author

Deladem Kumordzie

Challenging everything I know, unlearning & relearning⚡️ A rare breed of business and technology. Business Planning || Branding || Front End developer || Graphics || Entrepreneur || Interested in Venture Studios

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