Officially, the NBER defines a recession as “a significant decline in economic activity that extends across the economy and lasts for 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 contraction in a row This year.
Still, if the NBER does eventually declare a recession, it could take months, and it will also take into account other considerations, such as employment and personal income.
That puts the country in a gray area, Philipson said.
“Why do we let a university group decide? ” he said. “We should have an objective definition, not the opinion of an academic committee.”
To this end, the Federal Reserve is taking aggressive steps to temper soaring inflation, but “it will take some time for it to kick in,” he said.
“Powell is raising the federal funds rate, and he’s allowing himself to raise it again in September,” said Diana Furchtgott-Roth, a professor of economics at George Washington University and former chief economist at the Department of Labor. “He says all the right things.”
However, consumers are “paying more for gas and food, so they have to reduce other expenses,” Furchtgott-Roth said.
“The negative news continues to pile up,” she added. “We are definitely in a recession.”
The direction of the labor market will be key in determining the future state of the economy, the two experts said.
Consumption cuts come first, Philipson noted. “If companies can’t sell as much as they used to because consumers aren’t buying as much, then they’re laying off workers.”
On the positive side, “we have twice as many vacancies as unemployed, so employers won’t be so quick to lay off,” according to Furchtgott-Roth.
“It’s the path to a soft landing,” she said.
As the impact of record high inflation is felt across the board, every household will experience a setback to a different degree, depending on their income, savings and job security.
There are still some ways to prepare for a universal recession, according to Larry Harris, Fred V. Keenan Professor of Finance at the University of Southern California’s Marshall School of Business and former chief economist of the Securities and Exchange Commission.
Here is his advice:
- Streamline your expenses. “If they expect to be forced to cut spending, the sooner they do it, the better off they’ll be,” Harris said. This may mean cutting back on a few expenses now that you really want and don’t need, like subscription services you signed up for during the Covid pandemic. If you don’t use it, lose it.
- Avoid variable rate debt. More credit card have a variable annual percentage rate, which means there is a direct link to the Fed’s benchmark index, so anyone who has a balance will see their interest charges increase with each movement of the Fed. Homeowners with adjustable rate mortgages or home equity lines of creditwhich are indexed to the prime rate, will also be affected.
This is therefore a particularly good time to identify outstanding loans and see if refinancing logic. “If there’s an opportunity to refinance at a fixed rate, do it now before rates rise further,” Harris said.
- Consider putting money aside 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% until Octoberthe highest yield ever recorded.
While there are purchase limits and you can’t mine 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%. (Rates on online savings accounts, money market accounts and certificates of deposit are all set to increase, but it will take some time before these returns compete with inflation.)
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