What a recession could mean for you

Economy / July 29, 2022 / Admin / 0

Those questions weigh heavily on Americans after the Federal Reserve raised rates again to combat high inflation, and the latest gross domestic product report showed the economy slowed for the second straight quarter. But at the same time, the job and housing markets are still strong, although they have cooled down a bit.

This created a lot of mixed signals. The White House and other government leaders say the economy remains healthy. But several economists say there is a good chance that a recession will occur in the next few months. month – if one hasn’t started yet.

In the event of a recession, here’s how it could affect your finances and what steps you can take to protect yourself.

Over the past two years, the pandemic-induced labor shortage — coupled with a structural shortage in which fewer young workers are replacing retiring workers — has given employees great bargaining power.

As a result, unemployment and job losses have reached or are approaching historic lows.

“We have had a period of extremely low layoffs and labor shortages. Companies have been reluctant to lay off anyone,” said Andrew Challenger, senior vice president of global outplacement firm Challenger. Gray & Christmas.

That’s starting to change, Challenger said. Layoffs have spiked in some sectors, such as mortgage banking, fintech, construction and automotive.

If a recession hits, layoffs will likely be higher and more widespread. And employers could give up hiring.

But not everyone will be exposed to the same risk. If your role is in high demand – whether as a frontline worker, IT engineer, or senior executive – chances are you’re more likely to get a job, keep it, and even see raises and bonuses along the way. .

Buying and selling a house will be different

The housing market is not likely to be hit as hard by a recession as it was, for example, during the Great Recession of 2007-2009, which was caused by a housing and credit crisis.

That doesn’t mean the market won’t be affected at all, though, especially if layoffs resume, said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

How to take advantage of rising interest rates

But after two years of double-digit price growth and wild bidding wars, the home sales are slowly starting to return to a more normal pace thanks to rising mortgages rates, which make homes less affordable for buyers.

Looking ahead, Fratantoni said, “we expect the unemployment rate to increase by a low to medium amount, which, coupled with affordability issues, will lower demand. [for homes].”

This means that home sellers will no longer be able to price their properties 15% higher than the price at which their neighbor’s house just sold. They must be prepared to accept buyer contingencies in real estate offers. And they should expect their home to take longer to sell.

Oh, and appearances will count again.

“Pack up a bit to get it ready for the list. … We’ll be back to a place where it matters to have your house in good shape,” Fratantoni said.

For homebuyers, compared to the overwhelming frustrations of the past few years, “it’s going to be a much better experience,” he noted. Although it will become more and more expensive to take out a mortgage as rates rise, buyers will face less competition for each property. And when it comes to deciding whether or not to make an offer, “they may have days to think about it instead of hours,” Fratantoni said.

Ways to dab yourself now

Although you can’t control the business cycle, there are steps you can take to mitigate the potential negative effects a recession could have on you.

Secure your emergency cash: For single-income households, California-based Certified Financial Planner Jamie Lima of Woodson Wealth Management recommends having 12 months of living expenses on hand in case you lose your job.

For two-earner households, he recommends six months, as both earners are less likely to be laid off.

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If you don’t have that much now, cut out some non-essential expenses and add the money you would have spent to the pot.

And if you own your home, consider getting a home equity line of credit before rates go up, as it can help top up your emergency reserves as long as you can resist tapping it for something else. , said Lima.

Stress-test your financial plan: In the event of a recession, you could emerge unscathed. But you can’t assume that in advance. What you can do is figure out what resources you have to handle the worst-case scenario, like job loss or illness, Lima said.

“If you don’t have a job for a year, what does it look like? What are your contingency plans?… Now is the time to think about ‘What am I doing? ‘”, did he declare.

Improve your chances of keeping a job: You might not be the cybersecurity specialist every Fortune 500 company is looking for. But if you make yourself indispensable in your current job — perhaps by taking on additional assignments — you can lower your chances of being fired if that happens.

Or, you could consider a new role less likely to be laid off when the economy contracts. “If your job is in an industry or profession where income depends on buyers with the ability to postpone purchases, immediately begin job hunting for positions where this is not the case,” said Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. , who thinks there is a real risk that a recession will be longer and deeper than expected.

Watch cash flow carefully if you own a small business: Small business owners should keep spending as flexible as possible, said Ben Johnston, chief operating officer of small business lending company Kapitus.

The idea is to protect against a drop in demand in the coming months.

“It could mean [negotiating] more flexible payment terms with suppliers,” Johnston said. Or it could mean avoiding a long-term commitment to new spending. So instead of buying new equipment or hiring a full-time employee employee to take advantage of a new business opportunity today, consider leasing the equipment or hiring someone as a contractor.

“If you’re not sure how strong the economy is in a few months…consider temporary rather than permanent forms of expansion,” Johnston said.

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