‘We should have an objective definition’
Officially, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” In fact, the latest quarterly gross domestic product report, which tracks the overall health of the economy, showed a second consecutive contraction this year.
Still, if the NBER ultimately declares a recession, it could be months from now, and it will factor in other considerations, as well, such as employment and personal income.
That puts the country in a gray area, Philipson said.
“Why do we let an academic group decide?” he said. “We should have an objective definition, not the opinion of an academic committee.”
Consumers are behaving like we’re in a recession
For now, consumers should be focusing on energy price shocks and overall inflation, Philipson added. “That’s impacting everyday Americans.”
To that end, the Federal Reserve is making aggressive moves to temper surging inflation, but “it will take a while for it to work its way through,” he said.
“Powell is raising the federal funds rate, and he’s leaving himself open to raise it again in September,” said Diana Furchtgott-Roth, an economics professor at George Washington University and former chief economist at the Labor Department. “He’s saying all the right things.”
However, consumers “are paying more for gas and food so they have to cut back on other spending,” Furchtgott-Roth said.
“Negative news continues to mount up,” she added. “We are definitely in a recession.”
What comes next: ‘The path to a soft landing’
The direction of the labor market will be key in determining the future state of the economy, both experts said.
Decreases in consumption come first, Philipson noted. “If businesses can’t sell as much as they used to because consumers aren’t buying as much, then they lay off workers.”
On the upside, “we have twice the number of job openings as unemployed people so employers are not going to be so quick to lay people off,” according to Furchtgott-Roth.
“That’s the path to a soft landing,” she said.
3 ways to prepare your finances for a recession
While the impact of record inflation is being felt across the board, every household will experience a pullback to a different degree, depending on their income, savings and job security.
Still, there are a few ways to prepare for a recession that are universal, according to Larry Harris, the Fred V. Keenan Chair in Finance at the University of Southern California Marshall School of Business and a former chief economist of the Securities and Exchange Commission.
Here’s his advice:
- Streamline your spending. “If they expect they will be forced to cut back, the sooner they do it, the better off they’ll be,” Harris said. That may mean cutting a few expenses now that you just want and really don’t need, such as the subscription services that you signed up for during the Covid pandemic. If you don’t use it, lose it.
- Avoid variable-rate debts. Most credit cards have a variable annual percentage rate, which means there’s a direct connection to the Fed’s benchmark, so anyone who carries a balance will see their interest charges jump with each move by the Fed. Homeowners with adjustable-rate mortgages or home equity lines of credit, which are pegged to the prime rate, will also be affected.
That makes this a particularly good time to identify the loans you have outstanding and see if refinancing makes sense. “If there’s an opportunity to refinance into a fixed rate, do it now before rates rise further,” Harris said.
- Consider stashing extra cash in Series I bonds. These inflation-protected assets, backed by the federal government, are nearly risk-free and pay a 9.62% annual rate through October, the highest yield on record.
Although there are purchase limits and you can’t tap the money for at least one year, you’ll score a much better return than a savings account or a one-year certificate of deposit, which pays less than 2%. (Rates on online savings accounts, money market accounts and certificates of deposit are all poised to go up but it will be a while before those returns compete with inflation.)
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