Seven in 10 U.S. consumers see an economic downturn ahead, assuming one hasn’t already started. But awareness doesn’t equal preparedness — two in three admit they aren’t ready for what they think is coming, according to a survey from MagnifyMoney, a personal finance website.
“When you are living paycheck to paycheck and seeing everything around you go up in price by the day, it can be really scary,” said Matt Schultz, chief credit analyst at LendingTree, which owns MagnifyMoney. “You know you don’t have a lot of wiggle room to pay bills. We are seeing some of that fear in this survey.”
People are clearly concerned that things will get worse before they get better, he said. But if there is a silver lining, they are preparing, or at least trying to.
A separate survey from Empower, the retirement plan manager based in Greenwood Village, found that about three in four Americans are preparing for a recession by delaying purchases, boosting savings, paying off debt more aggressively and looking at “side hustles” to earn more income.
Who is more likely to feel unprepared? Women, adults in younger generations and lower-income households, according to the MagnifyMoney survey.
Inflation, higher housing costs and rising interest rates are the warning signs cited by those who see a recession coming. And the steps people are taking to prepare were similar to what Empower found in its survey — cut back spending, stick to a budget and build up emergency savings.
Whether those darker views reflect a sober assessment of what is to come or setting the stage for a self-fulfilling prophecy, consumers would do well to brace for a slowdown, experts said.
“It makes for an exceptionally difficult time for families to reach their personal goals,” said Wayne Winegarden, a senior fellow of business and economics at the Pacific Research Institute in Monterrey, Calif. “How do you squeeze a nickel and a penny? Those become the important considerations.”
A different kind of downturn
Recessions vary in what triggers them, and what excesses in the economy they correct. The next downturn, however, could be more like those seen in the 1970s and early 1980s when inflation was more of a problem.
Service workers at restaurants, hotels and entertainment venues suffered huge job losses during the short-lived pandemic recession in the first half of 2020. The Great Recession, which followed a housing bubble and financial crisis and was a drawn-out slog, devastated the mortgage and construction industries and pretty much anyone tied to residential real estate from 2008 on. Veteran Colorado tech and telecom workers know how brutal the 2000-2001 recession was for their aspirations.
The Federal Reserve is expected to keep raising interest rates and tightening the money supply to bring inflation, at a four-decade high, under control, which historically has been around 2%. The hope is for a soft landing, but the Fed is willing to trigger a recession to break the back of inflation running above 9%.
“For the first time in my 38-year career, the Federal Reserve is not going to bail out the market by lowering interest rates or flooding the system with liquidity. They are doing the exact opposite,” said Fred Taylor, a partner and managing director at Beacon Pointe Advisors in Denver.
Taylor said that when stocks go down in value, fixed income investments will normally rise, balancing out the losses. But stock markets are down by 20% or more and bond markets are down 10% to 15% because of rising interest rates. Investors are getting hammered left and right. So far, they aren’t showing any signs of panic.
Nor should people expect the kind of help the federal government provided during the pandemic when Congress approved a record $4.6 trillion in several assistance packages to deal with the outbreak and economic downturn. Those federal stimulus checks likely won’t be coming to the rescue this time, and they wouldn’t be particularly helpful if they did.
A popular definition of a recession is two consecutive quarters of declining economic activity. That is likely already baked in. But unusually strong growth in the first half of 2021, when the economy was rebounding from the worst of the pandemic, distorts any comparison. An official declaration of a recession will likely involve a more complicated calculation, and economists are divided on when that might happen.
“More formally, we don’t view the first half as a recession,” said Chris Varvares co-head of U.S. Economics for S&P Global Market Intelligence, during a webinar. Industrial production and hiring remained robust this year, which wouldn’t be the case if a recession were underway.
Even though the economy technically contracted in the first half of the year, employers still added 2.2 million net new jobs nationally and nearly 50,000 in Colorado through May. Unemployment rates moved lower despite the slower momentum. A more likely scenario is that employers will pull back on unfilled job openings rather than let workers go. The open jobs go away before the occupied ones do.
Workers might find it harder to hop around as they have the past year, and another piece of advice would be to plant roots until inflation is once again under control. But the lack of slack in labor markets, which are being driven by deeper demographic trends, could also mean fewer layoffs compared to the past three recessions.
Schultz said big job cuts would be a game changer and a clear signal that a deeper downturn is at play. Keep a close eye on the tech sector, which has been an important driver of job gains and higher wages in recent years.
Another scenario is one of high inflation that depresses economic growth, known as stagflation. The economy muddles along but higher prices persist and consumers are squeezed and miserable for far longer than they want to be. Varvares said that scenario hasn’t manifested either, but added the words “stay tuned.”
Consumer confidence is collapsing, but consumer spending is not. U.S. retail sales rose 8.9% nationally year-over-year in June, which in most years would be a sign of a still healthy economy. But the increase was just below the pace of inflation, meaning the extra spending represents a keeping up rather than a moving forward.
“In simple terms, consumers did not buy more stuff in June – they bought less product but paid more for it. This is not a comfortable position as it makes consumers feel downbeat, which is one of the reasons confidence is sliding,” said Neil Saunders, Managing Director of GlobalData in comments on the June retail sales numbers.
Dipping into accumulated savings and drawing on credit made that possible, but there are limits to how long that can go on, Saunders said.
How to prepare
Consumers need to save more, but inflation makes it harder to set money aside as basic living costs consume more of each paycheck. Inflation also erodes the value of those savings, requiring that more money be set aside. That could reflect why many people realize that rougher times are ahead, but feel unable to get ready.
“There is no vaccine for inflation,” Schultz said.
When it comes to paying down debt, the equation isn’t as clear cut, said Winegarden.
Inflation erodes the value of money, so yesterday’s debt can be paid in future dollars that are worth less. Technically speaking, it is worth stretching out those payments. But most credit cards and consumer revolving debt now carry variable interest rates, which are rising alongside inflation. Paying those debts should be a priority.
Another reason to get aggressive about paying down debts, even if they are at a fixed rate, is if someone thinks their job might be at risk in a downturn. Being free of debt will make it easier to maneuver financially and avoid a default that could wreck credit scores.
Investors might want to consider buying shares in companies that are paying dividends and are likely to grow those payouts through any downturn, Taylor said. While those stocks could still go down in value, dividends would help offset that. And losses in more conservative stocks have been less than those in growth stocks.
It is also important to keep losses in the market this year in perspective given the huge run-up since late March 2020. Strange things are happening and the economy may feel untethered, but that is typical in periods of adjustment and transition, said Tom Nun, a portfolio strategist at Empower.
“One of the worst things you can do when you are faced with uncertainty is to make rash decisions,” he said.
While most forecasts call for any recession to be less severe than others in recent history, consumers shouldn’t be sanguine, Winegarden said. The world has been full of surprises this decade, and more could be coming.
“The economic environment is dominated by a huge tail risk, a very large risk,” he warned. “We are very economically insecure. It’s like when you are on a balance beam and you are getting pushed. We could fall really far.”