This article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA.
Everyone ‘knows’ and is constantly talking about the next Recession, if we are not already in it already.
What is a Recession?
The textbook definition of a Recession is when the Gross Domestic Product (GDP) contracts for two straight quarters. For the first quarter of 2022 the GDP contracted 1.6 %, for the second quarter it contracted 0.9%. This was, naturally, announced the day after The Federal Reserve Board Open Market Committee raised rates by .75%. This followed a .75% point increase in June of 2022. The Feds Fund Rate Range Target in July 2023 is between 5.00% and 5.25%.
The reality is that the National Bureau of Economic Research (NBER) is the official arbitrator as to when a Recession begins and ends. They have not made their call for the 2023 (…or is it 2024?) Recession yet. Oh, and, don’t worry; we will likely be several months into the Recession before they make it ‘official.’
Why is the Fed raising the interest rate? In a word, Inflation. The Consumer Price Index (CPI) rose 4.8% over the last 12 months ending in June, 2023. This is down from 9.1% last year. (1) The goal of raising the interest rates is to bring down the current freight train of inflation. The risk is sending the economy into a Recession. Keep in mind, the Fed’s target for the Inflation Rate is 2%. You know what that means:
More interest rate hikes are coming!
Recessions are a downturn in the economy. Depressions are much more severe, with significant unemployment and meaningful declines in economic activity. Remember, you don’t need the NBER to tell you the difference between a recession and a depression.
It’s a recession when your neighbor is out of work. It’s a depression when you are out of work.
What is the History of Recessions?
Since 1948, there have been 11 Recessions. The last Recession was in the spring of 2020. This, or course, was a result of the Pandemic. This was brutal. The economy contracted 31.2% in the second quarter after falling 5.1% in the first quarter. This lead to 20.5 million jobs lost. Unemployment rose to 14.7% which was higher than the Great Recession of 2007-2009 of 10.6%. Leisure and hospitality were the hardest hit industries. This Recession was, gratefully, also the shortest on record, only two months.
The last Recession preceding this was the Great Recession of 2007-2009. This was even more brutal. This Recession was a result of the housing bubble and people lost their job, house, car and family.
Action Items:
1)Review your Asset Allocation
It’s always important to monitor your Asset Allocation. Face it, things change. Sometimes a lot. Monitoring your Asset Allocation is even more important during a Recession.
Pre-retirees and Retirees may want to consider reducing their allocation to Stocks. Although you may want to consider reducing both your Stock and Bond exposure, stay invested. Retirees need to ask, Is the 4% Safe Withdrawal Rate in Retirement Dead?
2)Review your Budget
Your Budget should be right up there with your Asset Allocation for its importance. It appears that many budgets were ignored during the Pandemic. The stimulus checks that constantly showed up was absolutely astounding. This worm has certainly turned. The Mailbox money the government was sending out is now totally shut off. Inflation is (really) turned on and up. Inflation is insidious. So many younger folks have never experienced this before as Inflation was benign for so long. Some are just starting to realize Things Are More Expensive When You Pay for them Yourself. It is a real revelation now just going to the grocery store or to pull up and buy gas.
Forget buying any vehicle, new or used.
In a Recession, something may happen to significantly affect your budget (if you don’t have one, now is the time to get one). Your spouse is informed that the WFH model is over for her at the end of the quarter. Day Care is now back in the budget again. Yikes that’s expensive, if you can even get it! At least you did not lose your job.
Or it could be your car is on its last leg or an unexpected medical issue arises. Either way, something unexpected may pop up and derail your plans.
3)Raise Cash
Even though you are monitoring your Asset Allocation above, you will (likely) want to raise even more cash. Hopefully you have already funded your Cash Reserve Fund. If not, now’s the time to get started! Most commentators recommend having 3-6 months of living expenses in a Cash Reserve Fund for emergencies. These funds should be in a money market or savings account. As they may be needed soon for an emergency, they cannot be invested in the Stock Market.
Stop beating yourself up if you do not have this much saved yet. Start where you are and go forward. If you are lacking here, take a look at getting a Side Hustle (see below.)
Consider raising even more cash as, well, you don’t know what can happen. If you look for it, good stuff can always happen. It’s the less than good stuff that can make things go sideways.
4)Pay Down Debt
If you have a fixed rate mortgage with a low interest rate, don’t start there. Just make your required monthly mortgage payments for now. It’s all of the other consumer debt you need to carefully review. This includes credit card, personal loans, car loans and student loans. Credit Cards tend to have the highest rates, by far. This is where to start, with this high cost debt.
Actually, where to start is to stop using your Credit Cards.
I know, without your Credit Cards, it’s going to be real hard to keep up with the Joneses. Sorry about that.
I also know that’s blasphemy to many. And, of course, Capital One Financial (COF) naturally wants to know, “What’s in your wallet?”
The answer should be, “Cash.”
For now, hold off on prepaying any student loan debt. Among the many proposals, there is a proposal to forgive up to $10,000 of student loans depending on the borrowers’ current income. Other proposals have been introduced that have significantly higher amounts of debt that would be forgiven.
Note, if any one of these proposals passes, this debt is not ‘forgiven.’ This debt is merely transferred to the taxpayers.
5)Side Hustle
If you don’t have one already, now may be a great time to get a Side Hustle.
Can you think of a more appropriate Title? Side (think nights and weekends), Hustle (a six letter word for work). The extra cash earned here will (likely) come in very handy. Remember; just don’t let this Side Hustle kill the Golden Goose, also known as your Day Job.
Please, don’t think that renting out your garage, parking space or your pool (by the hour) is a Side Hustle. It’s not. It might be an efficient way to generate some income, but clearly there is no Hustle involved. Also, before you enter into any of these rental agreements, if you have one, check in with your Homeowners Association rules first. Additionally, have a long conversation with your Insurance Agent and your Attorney to see that you are protected. You might find out Why Everyone Needs a $1 Million Dollar Umbrella Policy (or more).
6)Buckle up and Enjoy the Ride
This goes without saying, which is exactly why it needs to be said. Especially the ‘buckle up’ part. Life is already short enough. And, at times, it can be more than stressful enough. Going through a Recession after going through (?) the Pandemic, likely won’t help.
One easy way to enjoy the Ride is to just get outside. I know, it sounds really high tech.
Walking, running, hiking or biking…it doesn’t matter…just get outside.
In addition to monitoring your asset allocation, reviewing your budget and perhaps getting a Side Hustle, you still need to have some fun. And when times are tight, free fun is even better.
Very interesting and educational.
Thank you Tom.
Rhonda