Officially, the NBER define a recession as “a significant decline in economic activity that is distributed throughout the economy and that 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 straight contraction this year.
Still, if the NBER finally declares a recession, it could be months from now, and it will also take into account other considerations, such as employment and personal income.
What really matters is that their paychecks don’t go that far.
former acting chairman of the White House Council of Economic Advisers
That puts the country in a gray area, Philipson said.
“Why are we letting an academic group decide?” he said “We need to have an objective definition, not the opinion of an academic committee.”
Consumers are behaving as if we are in a recession
For now, consumers should focus Energy price shocks and general inflation, Philipson added. “This is affecting everyday Americans.”
To that end, the Federal Reserve is making aggressive moves to moderate rising inflation, but “it will take some time for it to work,” he said.
“Powell is raising the federal funds rate and leaves himself open to raising it again in September,” said Diana Furchtgott-Roth, a professor of economics 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 expenses,” Furchtgott-Roth said.
“The negative news continues to mount,” he added. “We are definitely in a recession.”
What’s Next: “The Road to a Soft Landing”
The direction of the labor market will be key to determining the future state of the economy, both experts said.
Philipson pointed out that the decrease in consumption is the first. “If companies can’t sell as much as before because consumers aren’t buying as much, then they lay off workers.”
On the other hand, “we have twice as many job offers as unemployed, so employers will not be so quick to fire people,” according to Furchtgott-Roth.
“This is the path to a soft landing,” he said.
While the impact of record inflation is felt across the board, each household will experience a setback to a different degree, depending on their income, savings and job security.
Still, there are quite 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’s Marshall School of Business and former chief economist at the Securities and Exchange Commission .
Here is his advice:
Streamline your spending. “If they expect they’re going to be forced to cut back, the sooner they do it, the better off they’ll be,” Harris said. This may mean cutting back on some expenses now that you just want and don’t really need, such as the subscription services you subscribed to during the Covid pandemic. If you don’t use it, lose it.Avoid variable rate debt. Most credit cards have a variable annual percentage rate, meaning there’s a direct connection to the Fed’s benchmark, so anyone carrying a balance will see their interest charges rise with every move by the Fed. Homeowners with adjustable-rate mortgages or home equity lines of credit, which are linked to the prime rate, will also be affected.
This makes this an especially good time to identify any loans you have outstanding and see if refinancing makes sense. “If there’s an opportunity to refinance to a fixed rate, do it now before rates go higher,” 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 an annual rate of 9.62% through October, the highest yield on record.
Even though there are purchase limits and you can’t tap into the money for at least a year, you’ll get a much better return than a one-year savings account or certificate of deposit, which pays less than 2%. (Fees on online savings accounts, money market accounts, and certificates of deposit are poised to rise, but it will be some time before those yields compete with inflation.)