Recession fears have been stoked by recent stock market volatility and the rise in unemployment rates. A rash of layoffs has sent shockwaves across the economy, especially in white-collar industries where skilled workers tend to be concentrated. When those sectors shrink, consumer spending drops, causing the overall economy to slow.
A recession typically happens when some short-term economic shock causes people to spend less, invest less and work less. It can last a few months or years, and it typically comes with higher jobless rates as businesses lay off employees to reduce costs and overhead.
When the COVID-19 pandemic hit in 2020, for example, it caused major losses in daily business and employment as governments enacted strict lockdowns to prevent spread of the virus. This led to a short recession that ended once people were allowed back to work.
While most economists don’t believe we are in a recession now, the risks have certainly increased. The standard definition of a recession is two consecutive quarters of negative GDP growth.
What’s more, rising interest rates (as measured by the federal funds rate) can eat away at consumer spending, which is the key driver of the economy. The Fed has been attempting to balance lower inflation with higher consumer spending, which is why the Fed is expected to start easing its monetary policy in December and deliver three more rate cuts over the next year or so.
While there’s no way to predict whether we will see a recession, it’s important for investors and households to plan accordingly. This includes creating a financial plan, tracking your cash flow and building a budget to help you live within your means even when the economy turns sour.