The odds of a recession in the U.S. economy in 2023 are not inevitable, but the likelihood of a widespread, prolonged downturn has grown this year from a whisper to a loud chorus.
Fitch Ratings, for example, said on Oct. 18, 2022, that the U.S. economy will face a recession starting the second quarter of 2023, but robust U.S. consumer finances will help cushion its impact.
“Fitch expects the U.S. economy to enter genuine recession territory — albeit relatively mild by historical standards — in 2Q23," reports Reuters.
On the same day, Goldman Sachs Chief Executive Officer David Solomon concurred.
“There's a reasonable chance of a recession in the U.S., but it's not certain," Solomon said after his company released third-quarter earnings. "I could still see a scenario with a soft landing."
Business owners are already taking action in case of a recession, but employees need to take heed and prepare as well.
Business Owners: Prepare for the Worst, Hope for the Best
Business owners have already been through a lot in the past two years from the pandemic to high inflation to supply chain issues to world political turmoil and the possibility of a recession is another dark cloud on the horizon.
“Business fundamentals remain true regardless of whether larger economic conditions are favorable or in decline. However, there are certain tweaks and adjustments that must be made in order to weather stormy periods like the one we're preparing to face,” wrote Nate Nead in Entrepreneur.
Most business owners, it seems, are taking heed of the adage to “prepare for the worst and hope for the best” as they take actions in advance of a possible recession such as:
- Building cash reserves
- Trimming non-essential expenses
- Properly managing and collecting invoices
- Downsizing and outsourcing operations
- Renegotiating with vendors
While the average employee might think that talk of a recession is something “above their pay grade” and, frankly, out of their control – they would be wrong to ignore the warning signs and not prepare like most business owners.
What Exactly is a Recession?
For starters, we need to wrap our heads around what exactly a recession is.
David Rodeck writing in Forbes explains that a recession is “a significant decline in economic activity that lasts for months or even years.
Experts declare a recession when the U.S. economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period.
In the U.S. recessions are officially declared by the National Bureau of Economic Research (NBER).
“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,” writes Rodeck.
Forbes says that the average recession historically lasts about 17 months, according to NBER data.
When and How Will an Official Recession be Called?
To make the official recession call, NBER relies on, besides GDP and inflation, factors such as:
- Real personal income (RPI)
- Retail sales
“The NBER also says there is “no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.” In other words, every set of economic conditions is different, and there is no specific threshold that must be met before a recession is declared,” says Forbes.
There have been a dozen recessions in the U.S. since the end of World War II, with half of them lasting eight months or shorter – including the 2-month recession aberration that occurred at the onset of the pandemic from February to April 2020.
U.S. recessions since World War II:
- Nov. 1948 to Oct. 1949: 11 months (peak unemployment +7.9 percent; GDP decline -1.7 percent)
- July 1953 to May 1954: 10 months (+6.1 percent; -2.6 percent)
- Aug. 1957 to Apr. 1958: 8 months (+7.5 percent; -3.7 percent)
- Apr. 1960 to Feb. 1961: 10 months (+7.1 percent; -1.6 percent)
- Dec. 1969 to Nov. 1970: 11 months (+6.1 percent; -0.6 percent)
- Nov. 1973 to March 1975: 16 months (9.0 percent; -3.2 percent)
- Jan. 1980 to July 1980: 6 months (7.8 percent; -2.2 percent)
- July 1981 to Nov. 1982: 16 months (10.8 percent; -2.7 percent)
- July 1990 to March 1991: 8 months (7.8 percent; -1.4 percent)
- March 2001 to Nov. 2001: 8 months (6.3 percent; -0.3 percent)
- Dec. 2007 to June 2009: 18 months (10.0 percent; -5.1 percent)
- Feb. 2020 to Apr. 2020: 2 months (14.7 percent; -19.2 percent)
Recessions Have Been Rare for Current Employees
Recession talk may sound esoteric and unimportant to many current employees because they have not experienced prolonged economic downturns.
Taking the 2-month plunge out of the equation that occurred at the start of the pandemic, Gen X employees have only worked through three recessions since they joined the workforce 35 years ago and millennials have only suffered one downturn in the last two decades, and Gen Z, the youngest generation, has not been through one.
There are some things in life that you can prepare for, even if you have not experienced them … the possibility of a hurricane hitting your area, or your airplane pilot saying, “folks, hate to bother you, but we might have to prepare for the possibility of a water landing!”
While there is still hope that the economic powers to be can bring the U.S. economy in for a “soft landing” it is better for the average person to prepare for a rough ride.
“Of course, you want to focus on getting through the recession, and some will be able to do that more easily than others,” certified financial planner Paul Deer, vice president at Personal Capital, told CNBC. “But across the board, you want to have a plan in place and stick to it.”
Here are some things you can do:
- Update Your Resume and Sharpen Your Job Hunt Skills: Remember above where businesses are preparing for a recession with buzzwords like “downsizing”, “outsourcing”, and “trimming”? That often leads to a reduction in staffing during a recession and employees need to be ready in case they lose their current jobs. Now is the time to be networking, as well as add new job skills and competencies.
- Reduce Expenses Now: Do not wait for a recession to cut back on your monthly discretionary spending. Look at reoccurring charges that you could live without and trim them now. Do you really need Netflix, Amazon Prime, Hulu, Disney+, etc. subscriptions? Decide what is important and trim the rest.
- Save for a Rainy Day: Those black clouds on the recession horizon mean you may need to tap into your “rainy day fund”. Unfortunately, many do not have an emergency fund. You should have 3 to 6 months of living expenses saved. Utilize those reduced expenses in the coming months to bulk up your rainy-day dollars.
- Ditch Your Debt: Easier said than done, but now is the time to pay down some of your debt. The Fed has been hiking interest rates to try and cool the economy and all rates, including credit card rates, are expected to keep rising. Do not add any new debt right now and pay down some of your current debt if possible.
- Don’t Panic: Many small investors have the urge to completely pull out of long-term investments during a downturn but that can be a huge mistake. It is impossible to time the markets, so pulling out typically means missing the best market days as the economy recovers. J.P. Morgan Asset Management’s 2019 Retirement Guide showed that from 1999 to 2018 if an investor missed just the 10 best days in the stock market, their overall return was in half, from 5.62 percent to 2.01 percent.
All the above tips will not hurt you if a recession happens to not materialize.
“During tough times, it’s normal to feel anxious about your lifestyle, career, and budget. Even if things improve and a recession never comes, practicing responsible money habits can only set you up for success,” says Intuit’s Mint Life blog.