On the horizon for Americans and other people of the world, questions such as: Will there be a recession? And if so, how bad is the situation? That’s after raising Federal Reserve interest rates Once again to combat high inflation, the latest GDP report showed that the US economy slowed for the second consecutive quarter.
But at the same time, the labor and housing markets remain strong, although they have calmed down a bit.
This created a lot of mixed signals. The White House and other government leaders have said the economy remains strong, but many economists say there is a high chance of a recession in the coming months, if the recession has not already begun.
In the event of a recession, here’s how it affects your money and steps you can take to protect yourself, according to CNN:
Get ready for tough business decisions!
Over the past two years, labor shortages caused by the pandemic — along with a structural shortage in which fewer young workers are replacing retired workers — have given employees a lot of bargaining power.
As a result, unemployment and job cuts have been at or near historic lows.
“We’ve had very low layoffs and labor shortages,” said Andrew Challenger, senior vice president of outsourcing firm Challenger Gray and Christmas. “Companies have been reluctant to let anyone go.”
That is starting to change, Challenger added, with layoffs in some industries, such as mortgage banking, fintech, construction and automobiles.
And if a recession occurs, layoffs are likely to be higher and more widespread. Employers may back off hiring.
But not everyone will be at the same risk. If your specialty is in high demand—whether you’re a frontline employee, an IT engineer, or a senior executive—you’re more likely to get a job, or keep your job and even see increases and rewards along the way.
Buying and selling homes
The housing market is unlikely to be affected as severely by a recession as it was, for example, during the 2007-2009 Great Recession, which was triggered by the housing and credit crunch.
This does not mean that the market will not be affected at all, especially if layoffs rise, said Mike Fratantoni, the chief economist at the Mortgage Bankers Association.
But after two years of double-digit price growth and wild auction wars, home sales are slowly returning to a more normal pace thanks to higher mortgage rates.
“Looking forward, we expect the unemployment rate to rise by a small to moderate amount, along with affordability challenges, leading to lower demand for homes,” Fratantoni said.
This means that selling homes will not be as flexible as currently available, and may also mean accepting lower bids and taking longer to make deals.
For homebuyers, it will be a much better experience than in years past, while getting a mortgage will become increasingly expensive with the current high interest rates, and buyers will face less competition for each property.
Ways to protect yourself now
While you can’t control the economic cycle, you can take some steps to mitigate the potentially negative effects of a recession on you.
For single-income families, California certified financial planner Jimmy Lima of Woodson Wealth Management recommends 12 months of living expenses in case you lose your job.
For families with dual incomes, he recommends six months, because it is unlikely that both workers will be laid off.
And if you don’t have much now, cut some nonessential expenses.
“If you own your own home, consider getting a home equity line of credit before prices go up again, because it can help supplement your emergency reserves as long as you can resist using them for anything else,” Lima said.
He advised that you should do a stress test for your financial plan: “If there’s a recession, you might come out of it unscathed. But you can’t assume that in advance.” Lima also said that what you can do is see what resources you have to deal with worst-case scenarios, such as job loss or illness.
“If you don’t have a job for a year, what will that look like? What are your contingency plans?…Now is the time to think ‘what do I do?'”
Improve your odds of staying in business. If you make yourself indispensable in your current job – perhaps by taking on additional tasks – you may reduce your chances of being laid off if it comes to that.
Or you might consider a new role that is less likely to lay off workers when the economy contracts.
“If your job is in an industry or profession where revenue depends on buyers who have the discretion to delay their purchases, start looking for a job immediately in sectors that don’t do business that way,” said Lakshman Akuthan, co-founder of the Economic Cycle Research Institute.
small business owners
“Small business owners should keep expenses as flexible as possible,” Ben Johnston, chief operating officer of small business lender Kapitus, advised to monitor cash flow closely if you own a small business.
The idea is to protect yourself in case the demand drops in the coming months.
“This could mean negotiating more flexible payment terms with sellers,” Johnston said. Or it could mean avoiding a long-term commitment to new expenses. So instead of buying new equipment or hiring a full-time employee to take advantage of a new business opportunity today, consider renting the equipment or bringing in someone as a contractor.
“If you are not sure how strong the economy will be in a few months…look at temporary forms of expansion rather than permanent forms,” he added.