‘We must have an objective definition’
Officially, the NBER defines a recession as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months.” The latest quarterly gross domestic product report, which tracks the overall health of the economy, even showed a second consecutive contraction this year.
Still, if the NBER finally declares a recession, it could be months away, and it will also take other considerations into account, such as employment and personal income.
That puts the country in a gray area, Philipson said.
“Why do we let an academic group decide?” he said. “We should have an objective definition, not the opinion of an academic committee.”
Consumers act as if we are in a recession
For now, consumers should focus on energy price shocks and overall inflation, Philipson added. “That has implications for ordinary Americans.”
To that end, the Federal Reserve is taking aggressive steps to dampen rising inflation, but “it will take some time for it to work through,” he said.
“Powell is raising federal fund rates and opening himself up to raising it again in September,” said Diana Furchtgott-Roth, an economics professor at George Washington University and former chief economist at the Department of Labor. “He says the right things.”
However, consumers “pay more for gas and food, so they have to cut back on other expenses,” Furchtgott-Roth said.
“Negative news continues to pile up,” she added. “We are definitely in a recession.”
What comes next: ‘The path to a soft landing’
The direction of the labor market will be key in determining the future state of the economy, both experts said.
Reducing consumption is paramount, Philipson noted. “If companies can’t sell as much as they used to because consumers don’t buy as much, they’re firing employees.”
On the plus side, “we have twice as many job openings as the unemployed, so employers aren’t as likely to fire people,” Furchtgott-Roth said.
“That’s the path to a soft landing,” she said.
3 ways to prepare your finances for a recession
While the impact of record inflation can be felt across the board, every household will experience a downturn to a different degree depending on their income, savings and job security.
Still, there are 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 Marshall School of Business and a former chief economist for the Securities and Exchange Commission. .
Here’s his advice:
- Streamline your expenses. “If they expect they’ll be forced to cut spending, the sooner they do it, the better off they’ll be,” Harris said. That could mean cutting down on a few expenses that you just want and really don’t need, like the subscription services you signed up for during the Covid pandemic. If you don’t use it, lose it.
- Avoid floating rate debt. Most credit cards have a variable annual 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 of the Fed. Homeowners with adjustable-rate mortgages or equity lines of credit, which are tied to the prime rate, will also be affected.That makes this a particularly good time to identify the outstanding loans and see if refinancing makes sense. “If there is an opportunity to refinance to a fixed rate, do it now before interest rates rise further,” Harris said.
- Consider storing extra money in Series I bonds. These federally-backed inflation-protected assets are nearly risk-free, paying 9.62% yoy through October, their highest-ever return.While there are purchase limits and you can’t tap the money for at least a year, you score a much better return than a savings account or one-year certificate of deposit, which pays less than 2%. (Rates on online savings accounts, money market accounts, and certificates of deposit will all rise, but it will take a while for those returns to compete with inflation.)