Could America be headed into another recession? In a 2023 survey from the National Association of Business Economics (NABE), 58% of economic experts predict a recession in the coming year.
But even those who anticipate a recession are uncertain as to when it may occur. One-third (33%) of respondents predict a recession in the April-June quarter, while 21% predict a recession starting in September.
What are signs of a recession, though? Keep reading to know what to look for, as well as how to survive a period of economic instability.
What Is a Recession?
The term “recession” refers to a period of economic decline, often characterized by a small constellation of features, such as rising consumer prices and declining national incomes. The U.S. economy is cyclical by nature, but when the nation experiences a decline that lasts for several months (or more), economists label such a period as a recession.
What Are Signs of a Recession?
A recession can’t be measured by any one factor alone, so simply asking what happens in a recession is rather general. Instead, economists point to a variety of indicators that can point to a possible recession.
The following are generally considered to be the most common signs of a recession:
Rising Inflation
Rising consumer prices can precede – and often precipitate – a recession. As they rise, Americans are able to spend less and less, and stores make fewer sales, which leads to a contraction in manufacturing and distribution.
According to the U.S. Bureau of Labor Statistics, consumer prices rose by 6.2% from February 2022 to February 2023. That’s lower than record highs, though is still a high rate of inflation that could very well herald a coming recession.
Reduced Personal Income
Lowered personal and household incomes are one of the key signs of a recession. With inflation on the rise, household incomes must also rise to compensate. When salaries fail to adjust for inflation, it leads to decreased spending power, which can lead to a recession.
On a positive note, hourly salaries are 15% higher than pre-pandemic levels, but even then, economists worry that may still not be enough to match the rise in prices of certain household goods. If the median income doesn’t align with rising consumer prices, it could also point to a looming recession.
A Negative Yield Curve
Another warning sign of an imminent recession is a negative yield curve, which refers to the measure of an investor’s return on bonds of different durations. For example, if a two-year treasury bond has a higher yield than its ten-year counterpart, that could signal a lack of investor confidence in the current state and projected direction of the U.S. economy.
Unfortunately, the current yield curve has been inverted as of February 2023. That doesn’t indicate a recession itself, but it speaks to an overall lack of confidence in the American economy, which can foreshadow greater instability ahead.
A Decline in Manufacturing and Trade
Steady manufacturing indicates the presence of jobs and regular distribution of consumer goods. Conversely, a contraction in manufacturing can indicate an inability of the economy to sustain itself or a reduction in consumer spending. Either way, a contraction in manufacturing spells instability for the economy, signaling a possible recession.
A 2022 survey from The National Association of Manufacturers suggests an uncertain outlook. Nearly two-thirds (62%) of respondents expect a recession during 2023, and 75.7% point to challenges found in maintaining a quality workforce. Time will tell as to how these fears will directly impact the economy, but they could mean trouble in 2023 or even beyond.
Rising Unemployment Rates
Climbing unemployment rates also indicate a lack of stability among key American businesses and industries, and it can cause a snowball effect: As Americans lose their jobs, they also lose their spending power. They buy fewer products as a result, leading to a contraction in consumer sales and manufacturing, which only pushes the country further toward a recession.
At present, America’s employment rates are strong but not rock-solid. The Bureau of Labor Statistics indicates that the current unemployment rate is holding at 3.6% (as of March 2023), while major companies like Google, Amazon, and certain banking institutions are laying off workers by the thousands. It is still too early to panic, but that doesn’t inspire confidence in America’s workforce for the future.
Geopolitical Instability
The final sign of a coming recession is also the most difficult to quantify. Despite all of our technology, the world remains a big place, and it’s not always easy to see how the political instability of one continent might impact the futures of others. Nevertheless, large-scale global conflicts or natural disasters can forestall international trade or restrict access to raw materials and natural resources, all of which can have negative impacts on the domestic economy.
Naturally, Americans are watching the Russo-Ukrainian War with bated breath. The ongoing conflict, with no resolution in sight, is restricting access to energy for Western countries, in addition to the ongoing supply chain crisis that some estimate will remain an issue through 2024.
How to Survive a Recession
While these concerns are legitimate, a recession doesn’t have to be a reason to panic. What happens in a recession will certainly impact your day-to-day living, as well as your investments, but with the right mindset, you can weather a coming financial storm.
With that in mind, here are a few tips that will help you learn how to survive a recession:
Trim Your Budget
In what may be the most painful step, many financial management experts recommend that Americans adopt a 50-30-20 strategy: Spend 50% of your budget on needs, 30% on wants, and save or invest the remaining 20%. With prices rising, now may be the best time to make sure you cut back on your wants, in particular.
Build Your Emergency Savings Account
Aim to save enough to cover three to six months’ worth of living expenses; that way, you’re covered should you face an unexpected car repair or medical bill. If the worst should happen and you lose your job, having a separate emergency fund means you’ll protect yourself from dipping into your primary savings account.
Avoid Debt
When money’s tight, it can be tempting to pull out your credit card, but be careful: If you’re unable to pay your monthly balance, you could face high-interest charges and possibly damage your personal credit, which will only make it harder to secure a loan in the future as the economy recovers.
Diversify Your Investments
Now isn’t the time to back off from investing; it may be a good time to bring more diversity to your portfolio. Purchase stocks from multiple companies and industries and diversify the types of assets you invest in. It may also be a good time to look into Treasury Inflation-Protected Securities (TIPS), which are uniquely keyed to the rate of inflation to help you earn money even as prices rise.
Focus on the Long-Term
If you’re an investor, just hearing the word “recession” can trigger a cold sweat, but don’t panic. Your best gains will happen over the long term. A recession can, indeed, put a dent in your investments for the time being, but if you focus on your long-range financial goals, you won’t have to worry as much about short-term economic instability.
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