It’s time to prepare for a recession

Publisher’s note: Lakshman Achuthan and Anirvan Banerji are co-founders of the Economic Cycle Research Institute (ECRI). The opinions expressed in this comment belong solely to their authors.

(CNN) — The economy is about to enter a recession, perhaps as soon as this year. To avoid too big a financial hit, Americans will have to brace themselves.

Last summer we wrote that the US economic growth was already beginning to slow down and that the economy would continue on this trajectory in the coming months. That is already proving true, with year-on-year GDP growth rising from 12.2% in the second quarter of 2021 to 3.5% in the first trimester of this year.

The Commerce Department typically cites the GDP growth as the quarter-to-quarter annualized percentage change, but those numbers tend to fluctuate much more than the year-over-year numbers. However, both data show the slowdown in economic growth between 2021 and 2022.

And there is a toxic mix of economic headwinds, such as the war in Ukraine and the Covid-19 lockdowns in China, causing supply shocks that drive inflation and slow growth.

A key part of the inflation problem is related to the $3.9 trillion in fiscal stimulus pumped into the economy in 2020 and 2021, along with more than $100 billion in bonds the Federal Reserve was buying every month since peak of the pandemic.

Of course, when economic slowdowns take hold, it makes sense for the Fed to try to prop up economic growth by cutting interest rates. But in this case, the Fed is trying to make up for not reacting to inflation sooner. We already warned last year that inflation was getting out of hand. The central bank should have acted since last summer.

Now the Fed has no choice but to tighten policy by aggressively raising interest rates to curb inflation. This materially increases the risk of pushing the economy into a full recession.

It was only six months ago that the Federal Reserve began to slow its asset purchases. And he finally started raising rates just two months ago, but by that time headline inflation had already spiked to a 40-year high, hitting Americans in every corner of the country.

For the average investor, it is difficult to find a place to hide. Recessions are often accompanied by genuine bear markets, in which stocks fall well over 20%, and often much more. And with the Fed aggressively raising rates, the bond market is no safe haven. Stocks and bonds are riskier than usual, and rising inflation means even the cash under your mattress is losing its buying power.

What can Americans do? One of the answers may be to do nothing, and try to ride out the volatility without trying to gauge the market. For those willing to put away some money for at least a year, inflation-protected Treasuries could be part of the mix.

Consumers might consider cutting back on non-essential spending, especially by avoiding splurges on high-value items. With the storm clouds of the recession looming, it’s a good idea to put aside some money for a lean time.

And for job seekers, since recessions bring significant job losses, now is the time to update your resume and make any career moves while the job market is still hot. Keep in mind: Relatively secure jobs are found in companies whose products or services customers need every day, even during a recession, making these companies less vulnerable to economic downturns.

There will be more difficult economic news to come. And prudence calls for skepticism about any reassuring words from the Federal Reserve, the Biden administration or Wall Street optimists about an expected “soft landing.” But preparing ahead of time can help soften the blow.

Having missed the opportunity to raise interest rates last year, the Federal Reserve is now risking a recession to curb inflation. Therefore, realistically and objectively, it is time to be on guard.

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