Is the U.S. in a recession? How to prepare for an economic downturn

The dreaded R word has been thrown around a lot recently. 

For many, just the thought of a recession conjures bad memories of the 2008 crisis and fuels fears about job losses. Now, raging inflation, rate hikes from the Federal Reserve and a slumping stock market are combining to make another economic downturn more likely. 

It’s going to be hard to avoid given that the latest inflation figures came in hotter than expected, increasing pressure on the Fed to act aggressively. 

Bloomberg Economics forecasts a 38% probability of a recession over the next 12 months, but many households and businesses feel like it’s already here. Wells Fargo Investment Institute says that’s a correct assumption.

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“There’s a lot of conversation around if we’re already in a recession,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments. “The official data on a recession may be a lagging indicator. That’s not necessarily helpful for people making decisions right now in their day-to-day lives and their investments.”

Here’s what you need to know about recessions and how to prepare: 

What’s a Recession?

The official definition varies. Some define a recession as two consecutive quarters in which output declines. The National Bureau of Economic Research is technically in charge of declaring recessions, which it defines as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

The committee meets in secret and is comprised of economists and academics, or “eggheads” according to one past member. It usually takes them about a year to decide on a recession call.

The length of a recession can vary widely. For instance, the pandemic-fueled recession in 2020 lasted only two months, while the Great Recession went on for about 18 months. 

Are We In One?

It depends who you ask. Most economists say not yet, although gross domestic product, or GDP, did decline in the first quarter of the year. However, that can largely be attributed to a surge in imports, not a reduction in consumer spending, which would be a more negative signal.

GDP figures for the second quarter are scheduled to be released later this month and may show a second consecutive drop, but with the strong consumer spending and solid labor market, most experts say a true recession isn’t here yet. 

Can It Be Avoided?

It’s possible, although unlikely. To fight inflation, the Federal Reserve has been raising interest rates, with the goal of cooling the economy just the right amount to orchestrate a so-called “soft landing.” The risk is that the hikes reduce consumer demand too much, leading to a reduction in corporate profits and job losses. Federal Reserve Chair Jerome Powell said in late June that achieving that perfect balance will be “very challenging.”

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There’s also a powerful psychological effect at work. If consumers think the country is in a recession or soon to be, they might curtail spending, which hurts the economy. It’s a real risk considering that more than half of Americans believe the US is currently in a recession, according to an Economist/YouGov Poll. Surging inflation — the June report showed a 9.1% average price increase from last year —  could also lead people to buy less.

Unlike the last recession, social media is a dominant force in Americans’ lives and often where they express their recession fears, said Shaun Maslyk, a certified financial planner and host of “The Most Hated F Word,” a podcast about personal finance. 

“That can exacerbate the problem because fear and anxiety take over,” he said.

Will I Get Fired?

Right now, the job market is still strong. In June, employers added 372,000 jobs, and the unemployment rate is currently at only 3.6%. There are pockets of weakness, but they're mostly concentrated in the tech sector, where companies have seen rapid plunges in their stock prices. Cryptocurrency firms like Coinbase Global Inc. and Gemini Trust Co. are also cutting jobs. 

For those concerned about layoffs, try to build up emergency savings of least three to six months of living expenses, experts say. If you do experience a job loss, remember you have options — there are still lots of openings. 

“Most workers who are losing jobs are finding new ones quickly,” said Bill Adams, chief economist for Comerica Bank in Dallas. 

What Else Can I Do?

The most common advice from financial experts: Don’t panic. Now is not the time to make drastic decisions or put all your investments in cash, especially considering the high rate of inflation, Goodwin said. 

However, it is good to consider your risk tolerance and make sure you’re diversified. Goodwin likes areas such as municipal bonds or value equities, which are inexpensive relative to earnings. US Series I savings bonds are also popular right now, since they offer a low-risk way to lock in an interest rate of 9.62%. 

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Noah Damsky, a financial planner at Marina Wealth Advisors, recommends some overall “belt tightening.” Cutting down on discretionary expenses and boosting savings is always a good idea, but especially so when a recession might be coming.