Here’s why we should — and shouldn’t — worry.
- Soaring inflation and rising interest rates have experts worried about an economic decline.
- We can’t say for sure that a recession is coming, but it’s best to be prepared for it nonetheless.
At this point, it looks increasingly likely that the US economy will manage to avoid a recession in 2022. After all, we are in the latter part of September, and we are looking at relatively low levels of unemployment and a labor market which is still going strong.
But economists still worry that things will get significantly worse in 2023, and that’s understandable. Inflation is still skyrocketing and consumers really need relief. The Federal Reserve therefore plans to continue raising interest rates in an effort to slow inflation and bring the cost of living down to more moderate levels.
By raising interest rates and making borrowing more expensive, the Fed hopes to steer the economy toward a scenario where consumer spending declines enough to allow supply to catch up with demand, but not so much that the economy is starting to suffer. But it’s a very delicate balance to find. And it’s quite possible that interest rate hikes will actually fuel a sufficiently steep decline in consumer spending to reach recession territory in 2023.
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But while we may have a recession in 2023, that’s not necessarily a reason to panic.
Not all recessions are created equal
When we think of recessions, we tend to imagine prolonged periods of rampant unemployment and generally poor economic conditions. But not all recessions are long. It is possible to enter a recession and come out of it a few months later. And because the labor market is so strong right now, that’s a possible scenario for a 2023 recession.
This assumes, of course, that we even reach that point. Consumer spending may decline slightly month-over-month in order to slowly lower inflation levels without sending the economy into a downward spiral.
How to prepare for a recession
Ultimately, only time will tell if things get bad enough economically to touch recessionary territory in 2023. But either way, preparing for a downturn is a smart bet, because if the ‘no knocking, you will still have consolidated your finances.
Perhaps the best thing you can do to prepare for a recession is to increase your emergency fund. In fact, you might want to aim for up to 12 months of living expenses in your savings account in case you lose your job during a recession and it takes a while to find another one. That said, if you’re in a two-income household with two stable jobs to date, you may feel perfectly comfortable having a six- or eight-month emergency fund.
Another good bet is to work on building your job skills to potentially avoid a layoff. The more value you bring to your business, the harder it will be to let you go if downsizing becomes necessary.
All told, without a crystal ball, we can’t say for sure whether or not a recession will happen in 2023. But if you’re doing your part to prepare for it, you shouldn’t have to actively worry about it.
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