Anxious About a Possible Recession? Some Answers on Layoffs, Debt and Investing

Anxious About a Possible Recession? Some Answers on Layoffs, Debt and Investing

This story is part of So Money (subscribe here), an online community dedicated to financial empowerment and advice, led by CNET Editor at Large and So Money podcast host Farnoosh Torabi. What’s happening

A rising number of financial experts say the US is headed into a recession, which is defined as two sequential quarters with a significant, pervasive decline in economic activity. Why it matters

Recessions are historically marked by widespread layoffs, bankruptcies, higher borrowing costs and turbulence in the stock market. What’s next

Gather facts to protect your financial position. No one can predict the future, and it’s important to move calmly and deliberately.

As inflation continues to soar and the stock market experiences its worst first half of the year since 1970, economists and financial experts worry we could be on the verge of a recession. Technically, the country is in a recession when gross domestic product, the value of all goods and services produced during a specific period, falls during two quarters back-to-back. In the first three months of 2022, the US GDP dropped by 1.4%. The National Bureau of Economic Research, which makes the official call about a recession, meets later this month.

There’s also concern that the central bank’s aggressive efforts to tame inflation by slowing down the economy could cause a severe economic downturn. Historically, to lower inflated consumer prices, the Federal Reserve raises the federal funds rate, which makes borrowing money more expensive. But this year’s three rate hikes — including the most recent, which was the largest in nearly three decades — haven’t made a dent in inflation, which currently sits at 8.6%, more than four times higher than “normal” inflation.

Federal Reserve Chairman Jerome Powell acknowledged the risk of recession during a European Central Bank forum on Wednesday. But he also noted, “I wouldn’t agree that it’s the biggest risk to the economy. The bigger mistake to make … would be to fail to restore price stability.”

With recession fears ramping up, you’re probably concerned about what this could mean for your finances and your employment. My So Money podcast audience recently sent in a number of questions related to recessions about how best to prepare, save , invest and make smart money moves in these uncertain times. Here’s a bit of guidance to help navigate this difficult financial period. First, what could I see in a recession?

It’s always helpful to go back and review recession outcomes so that we can manage our expectations. While every recession varies in terms of length, severity and consequences, we tend to see more layoffs and an uptick in unemployment during economic downturns. Accessing the market for credit may also become harder and banks could be slower to lend, because they’re worried about default rates.

If the Federal Reserve continues to raise rates to try to clamp down on inflation, we’ll see an even greater increase in borrowing costs — for mortgages, car loans and business loans, for example. So, even if you qualify for a loan or credit card, the interest rate will be higher than it was in the prior year, making it harder for households to borrow or pay off debt. We’re already seeing this in the housing market, where the average rate on a 30-year fixed mortgage was recently approaching nearly 6%, the highest level since 2009.

During recessions, as rates go up and inflation cools, prices on goods and services fall and our personal savings rates could increase , but that all depends on the labor market and wages. We may also see an uptick in entrepreneurship, as we saw in 2009 with the Great Recession, as the newly unemployed often seek ways to turn a small business idea into reality. Should I expect layoffs?

With the unemployment rate sitting at 3.6%, the job market may appear to be, at least right now, the only stable part of the economy. But that’s likely to be temporary, as companies battling with the current financial headwinds — including inflation, rising interest rates and weakening consumer demand — have already begun to announce layoffs. According to , a website that tracks job losses at tech startups, there were close to 37,000 layoffs from startups in the second quarter of 2022.

In the Great Recession, unemployment peaked at 10%, and it took an average of eight to nine months for those out of work to secure a new job. So now could be the time to review your emergency fund if you think there’s a shortfall. If you […]

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