This story is part Recession Assistance ServiceCNET’s coverage of how to make smart money moves in an uncertain economy.
After almost a year of battle, inflation finally shows up signs of cooling as shown in this week’s Consumer Price Index report. The stock market rallied in response as investors hoped the Federal Reserve might finally pull back aggressive interest rate hikes at next month’s meeting.
While this sounds like good news for the economy, it’s important to note that prices are continuing to rise – they’re just not rising at the same rate we’ve seen throughout the spring and summer. . This may indicate that the Fed rate hikes and overall improvement in the supply chain are starting to bring the inflation rate down. But it is too early to know whether inflation will actually start to decline.
There remain widespread concerns about a recession, although experts predict it will be milder than many originally thought. But while prices remain high and interest rates soar, that we are facing an official recession seems like a game of semantics. And, with more layoffs in the news, it’s clear that ordinary Americans are in trouble.
Here’s what to expect during downturns, what to know about layoffs and interest rates, and some tips on how to to register, invest and make smart money moves in uncertain times.
Read more: It’s been a wild ride for the stock market. And after?
What happens during a recession?
It is always useful to go back and examine the results of the recession so that we can manage our expectations. While each recession varies in duration, severity and consequences, we tend to see more layoffs and a slight increase in unemployment during economic downturns. Access to the credit market could also become more difficult and banks could be slower to lend because they worry about default rates.
Read more: The economy is scary. This is what history tells us
As the Federal Reserve continues to raise rates in an attempt to rein in inflation, we will see an even bigger increase in borrowing costs – for mortgages, car loans and business loans, for example. So even if you get a loan or a credit card, the interest rate will be higher than it was the year before, which will make it more difficult for households to borrow or repay their debts. We are already seeing this in the housing market, where the average rate on a 30-year fixed mortgage is around 7%, with some buyers seeing rates well above 7% – the highest level since 2009.
During recessions, as rates rise and inflation slows, the prices of goods and services fall and our personal savings rates could rise, but it all depends on the labor market and wages. We could also see an increase in entrepreneurship, as we saw in 2009 with the Great Recession, as the newly unemployed often look for ways to turn a small business idea into reality.
Should we expect more layoffs?
With layoffs in big companies like Meta and Twitter, job security is a priority for many. Right now, the official Bureau of Labor Statistics unemployment rate sits at 3.7%, which is considered low. The Federal Reserve projects the unemployment rate to reach 4.4% by the end of 2023, indicating that more layoffs are on the horizon.
But the official unemployment rate doesn’t tell the full picture, as CNET editor Laura Michelle Davis noted in a recent history unpacking unemployment statistics. “People who have given up looking for work are not even counted as unemployed, while part-time employees or the self-employed who might only find one hour of work a week – financially unsustainable by any standard – are treated as employees,” Davis wrote. According to the Ludwig Institute for Shared Economic Prosperity, the actual percentage of Americans struggling with unemployment or underemployment is closer to 22.3%.
During the Great Recession, when unemployment peaked at 10% as measured by the BLS, it took an average of eight to nine months for the unemployed to find a new job. So it might be time to review your emergency fund if you think there is a shortfall. If you are unable to cover a minimum of six to nine months of expenses, which is difficult for most people, see if you can accelerate the savings by reducing expenses or generate extra money. It’s also a good time to make sure your resume is up-to-date and to network with influential people in your professional and personal networks. Whether you are firedmake sure you apply for unemployment benefits right away and secure your health insurance.
If you’re self-employed and worried about a potential downturn in your industry or a loss of customers, explore new sources of income. Also aim to increase your cash reserves. Again, if previous recessions have taught us anything, it’s that having money unlocks choices and leads to more control in tough times.
Will interest rates on loans and debts continue to rise?
Although this week’s CPI data brings good news, prices continue to rise…meaning another rate hike is coming in December, although it may not be. not as drastic as the previous ones. You should be prepared that interest rates on mortgages, credit cards and loans will continue to rise for some time, which will make your monthly payments more expensive.
Paying off your debts now, if you can, is the best way to avoid accruing interest. If you cannot fully repay your debts, check with your lenders and card issuers. low interest credit options or see if you can refinance or consolidate debt at a single fixed rate loan.
During past recessions, some financial institutions were reluctant to lend as often as they did in “normal” times. This can be confusing if your business relies on credit to grow or if you need a mortgage to to buy a house. It’s time to pay close attention to your credit score, which is a determining factor in a bank’s decision. The higher your score, the better your chances of qualifying and getting the best rates.
Should I stop investing in my 401(k)?
The stock market has soared for most of 2022, although it edged up slightly this week in light of the better-than-expected inflation report.
Regardless of what happens next week, continue to invest if you can afford it. Avoid panicking and cashing out just because you can’t stand the volatility or watch the down arrows during a bear market.
My advice is to stop the knee jerk reactions. Now might be a good time to review your investments to make sure you’re well diversified. If you suddenly notice a change in your risk appetite for any reason, talk to a financial expert to determine if your portfolio needs adjustment. some online robo-advisor the platforms offer services to customers and can provide advice.
Historically, it pays to stay true to the market. Investors who cashed in their 401(k)s during the Great Recession missed a rebound.
The only caveat is that if you desperately need the money you have in the purse to pay for an emergency expense like a medical bill, and there’s no other way to afford it . In that case, you might want to check out 401(k) loan options. If you decide to borrow from your retirement account, commit to paying it back as soon as possible.
Should I wait to buy a house?
Despite a rate cut this week, mortgage rates tiptoed over the 7% interest rate threshold. And with house prices still high, buying a home right now could be more expensive than renting. A report by John Burns Real Estate Consulting looked at the cost of owning versus renting in the United States in April and found that owning was $839 more per month than renting. That’s nearly $200 more than at any time since 2000.
Fixed 30-year mortgage rates have essentially doubled since last spring, which has helped slow supply and cool housing prices — but competition among buyers is fierce due to historically low inventory. Cash bids and bidding wars continue in many markets. If you have been shopping for a house past months or year to no avail, you may feel exhausted and defeated.
Don’t be hard on yourself. You’re doing nothing wrong if you haven’t offered the best deal yet. While it’s true that a fixed-rate mortgage can give you more predictability and budget stability, as long as inflation continues to outpace wages, there could be some upsides to renting right now. For one thing, you’re not buying a house in a bubble market that some economists believe is about to burst. If you have to unload the house in a year or two – during a possible recession – you risk selling at a loss.
Second, leasing allows you to keep the money you would have spent on a down payment and closing costs, and will help you stay more liquid during a time of great uncertainty. This allows you to pivot faster and secure your finances in the event of a downturn. Remember: money is power.
Read more: As the housing market faces a “particularly cold winter”, can homebuyers get the upper hand?
My final note is that it is important to remember that recessions are an integral part of the business cycle. Long-term financial plans will always experience periods of decline. Since World War II, the United States has experienced a dozen recessions and they usually end after a year or sooner. On the other hand (and to give you better news), periods of expansion and growth are more frequent and longer lasting.
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