Here’s why we should, and shouldn’t, be worried.
- Skyrocketing inflation and rising interest rates have experts worried about an economic downturn.
- We can’t say for sure that a recession is coming, but it’s best to prepare for one anyway.
At this point, it seems increasingly likely that the US economy will manage to avoid a recession in 2022. After all, we are in the latter part of September and we are seeing relatively low levels of unemployment and a labor market that is still going strong
But economists still worry that things could get markedly worse in 2023, and understandably so. Inflation continues to rise and consumers really need relief. Therefore, the Federal Reserve has plans to continue implementing interest rate increases in an effort to curb inflation and reduce the cost of living to more moderate levels.
By raising interest rates and making borrowing more expensive, the Fed hopes to guide the economy to a scenario in which consumer spending falls enough to allow supply to catch up with demand, but not so much that economy begins to suffer. But that’s a very delicate balance to strike. And there’s a strong possibility that interest rate increases will, in fact, fuel a steep enough drop in consumer spending to reach recession territory by 2023.
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But while we may have a recession in 2023, that’s not necessarily cause for panic.
Not all recessions are the same
When we think of recessions, we tend to imagine prolonged periods of rampant unemployment and generally poor economic conditions. But not all recessions are long. It is possible to enter a recession and exit a few months later. And because the job market is so strong right now, that’s a possible scenario for a recession in 2023.
That assumes, of course, that we get to that point. It is possible for consumer spending to fall modestly month-over-month to bring inflation levels down slowly without sending the economy into a downward spiral.
How to prepare for a recession
Ultimately, only time will tell if things get financially bad enough to hit recession territory in 2023. But either way, preparing for a recession is a smart bet, because if it doesn’t, you’ll have bolstered your finances. anyway.
Perhaps the best thing you can do to prepare for a recession is to increase your emergency fund. In fact, you might want to aim for up to 12 months of living expenses in your savings account in case you lose your job during a recession and take a while to find another. That said, if you currently live in a two-income household with two steady jobs, you may be perfectly comfortable with six or eight months’ worth of emergency funds.
Another good bet is to work on improving your job skills to potentially avoid being fired. The more value you bring to your business, the harder it will be to let go if you need to downsize.
All in all, without a crystal ball, we can’t say for sure whether or not a recession will happen in 2023. But if you’re doing your part to prepare for one, it’s something you shouldn’t be actively worrying about.
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