Are We Heading Toward a Recession in the Near Future?

If you’ve paid attention to headlines lately, you might not be feeling too optimistic about the future of the economy. Many analysts are predicting a recession which could begin next year, and some predictions appear dramatic. But is the situation really that bad? And how can you prepare for a recession?

First, let’s talk about the factors driving these predictions. Analysts look at a couple of warning signs and then compare those to past economic patterns. And we know that for the past 75 years, inflation that exceeded 4 percent combined with unemployment below 5 percent would always precede a recession by about two years.

Now, the inflation rate has hit 8 percent and unemployment has dipped to 3.6 percent. And so based on the above reliable pattern, it is reasonable to say that a recession could be on the way soon.

And of course, we know that the situation in Ukraine, global supply chain problems, and skyrocketing gas prices certainly don’t help matters.

The final factor in these predictions comes down to wage stagnation. Inflation has pushed prices of basic commodities much higher than usual, but wages do not adequately reflect this change in the cost of living. We call that “wage stagnation”, and basic necessary purchases become a sort of “tax” on each individual’s personal wealth.

Even with all of those factors in the mix, a recession isn’t guaranteed at this time. The Federal Reserve can and probably will take certain steps to potentially ward off an economic downturn. A policy called quantitative easing allows the Fed to flood debt markets with cash to stimulate economic activity, and they have been doing that. Maintaining low interest rates can also help to stimulate lending.

But gradually, they must raise interest rates and end quantitative easing in order to push the inflation rate back down. Will it work? No one can say for sure, as the future is never written in stone.

But in the meantime, we should always remember that economic fluctuations are simply a part of life. They have happened before and will (eventually) happen again. Whether a recession is due in 2023 or not, we should all be prepared to assess the situation and adjust our financial planning strategies accordingly. So let’s discuss this issue in more depth at your next appointment, and we can help you decide how to prepare.