4 reasons the economy looks like it’s crumbling — and what to do about it

Pretty much anyone who wants a job can get one. The economy is so hot that prices are rising faster than at any time since the 1980s. The housing market is on fire. Consumers spend like crazy.
Yet we hear the word ‘recession’ over and over as if it were 2007. What gives?

The truth is, we’re probably not in a recession right now (although it may be), but there are plenty of signs that one is just around the corner.

Sign 1. The Fed Raises Rates

Inflation is rampant and the Federal Reserve’s tool to combat rising prices lies in its ability to raise interest rates. That makes borrowing more expensive and slows the economy — on purpose.

The problem is that the Fed was too late to raise interest rates. Inflation was a growing problem in 2021, but the central bank only started raising interest rates in March 2022. So the Fed needs to catch up – and take much more drastic action than if it had started raising interest rates last year.

Last week, the Fed raised interest rates by half a percentage point, the largest rate hike in 22 years.

Fed Chair Jerome Powell said this month the central bank would continue to raise interest rates by half a percentage point at the end of each meeting until it is convinced inflation is under control — then the Fed would keep interest rates at a quarter point. increase for a while.

The Fed is confident it can raise interest rates without sending the economy into recession. But that so-called soft landing has proved elusive in the past, and many Wall Street banks believe the Fed will drive a recession to get out of inflation.

Sign 2. The stock market is in sell everything mode

Extreme fear has been the dominant sentiment on Wall Street this year. CNN Business’s Fear & Greed Index ranks a meager six out of 100.
More than $7 trillion wiped from the stock market this year
After hitting record highs in early January, the stock market has lost nearly a fifth of its value, causing stocks to plummet near bear market territory. The Nasdaq COMP is already deep in a bear market. More than $7 trillion has evaporated from the stock market this year.

Concerned that higher interest rates will erode corporate earnings, investors have been heading for the exits.

That’s bad news for people’s retirement plans. It’s also unwelcome news for a number of investors who rely on the market for income, including day traders who have counted on the stock market to grow in a near straight line for most of the decade. And it’s not good for consumer confidence either.

Although a minority of Americans actively invest in the stock market, historically it has calmed people when they see a sea of ​​red next to CNN’s ticker or on their phone screens. Consumer confidence fell to its lowest level in 11 years in May.

That’s potentially bad news for the economy, as consumer spending accounts for more than two-thirds of America’s gross domestic product.

Sign 3. The Bond Market

When investors aren’t so keen on stocks, they often switch to bonds. Not this time.

Safe US government bonds are on sale. When bond prices fall, yields rise – and 10-year Treasury yields rose above 3% this month for the first time since 2018.
How long does inflation last?  The answer lies in the past

That usually happens when the Fed raises interest rates – the higher borrowing costs make the bonds less valuable when they mature, so a higher interest payment on the bonds (the yield) will help offset them and make them more attractive to investors.

Bonds have also been sold, as the Fed has decided to run down its huge portfolio of government bonds that it had bought since the pandemic to support the economy.

As bonds sold out and investors grew increasingly fearful of an economic downturn, the gap between short-term and long-term bond yields narrowed. Two-year government bond yields briefly rose above the 10-year benchmark in March for the first time since September 2019. This so-called yield curve inversion has preceded every recession since 1955, producing a “false positive”. once, according to the Federal Reserve Bank of San Francisco.

Sign 4. Chaos around the world

None of this happens in a vacuum. Russia continues its deadly invasion of Ukraine, which has choked supply chains and pushed up energy prices. China continues to shut down some of its largest cities as the number of Covid cases remains high. And a labor shortage has pushed salaries up and hampered the normal flow of goods around the world.
Russia continues to threaten European countries by cutting off their energy supplies, which could plunge EU economies into recession. The Chinese economy has slowed dramatically as it keeps workers at home as part of its zero-covid policy.

What happens abroad can also spill over into the United States and hurt the US economy at the worst possible time.

What must we do

Okay, so a recession could be coming soon. this is what not to do: Panic.
Even if a recession is inevitable, there is no telling how severe it will be. But it never hurts to anticipate the worst. Here are a few ways financial advisors say you can protect your finances from a recession.

Place a new job now: With ultra-low unemployment and many vacancies, it is a market for job seekers. That can change quickly in a recession.

Cash in on the housing boom: If you’re in doubt about selling your home, now might be the time to make a list. House prices in the United States are up nearly 20% year-on-year, but mortgage rates are also rising, which will ultimately dampen demand.

Set aside some money: It’s always a good idea to have liquid assets – cash, money market funds, etc. – to cover urgent needs or unexpected emergencies.

Finally, some wise advice for every market: don’t let your emotions guide you. “Stay invested, stay disciplined,” says certified financial planner Mari Adam. “History shows that what people — or even experts — think about the market is usually wrong. The best way to achieve your long-term goals is to just stay invested and stick to your allotment.”

— Allison Morrow and Jeanne Sahadi of CNN Business contributed to this report.

Leave a Comment

Your email address will not be published.