Brace Yourself for a Severe Recession
The U.S. economy has been slowing down at an alarming pace. A recession seems certain for 2023, and if you’re hoping for a soft landing, you might be disappointed.
Recessions and economic slowdowns are common phenomena; they’re part of the business cycle. However, knowing the severity of slowdowns could help you make investing decisions and protect your wealth.
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One way to figure out how severe a recession for the U.S. economy could be is to examine how American consumers are doing.
Consumers are a major force behind the U.S. economy. If they’re in bad financial shape, a recession might be severe and prolonged. If they’re somewhat in decent financial shape, an economic slowdown might not be as dangerous.
As it stands, American consumers are in very rough shape financially.
Majority of Americans Living Paycheck to Paycheck; Savings Plummeting
According to a recent survey, 58% of Americans have been living paycheck to paycheck. Some 70% of Americans said they felt stressed out about their finances as inflation soared, interest rates skyrocketed, and economic uncertainty grew. (Source: “With Inflation Stubbornly High, 58% of Americans Are Living Paycheck to Paycheck: CNBC Survey,” CNBC, April 11, 2023.)
Moreover, Americans’ savings have dropped by a lot.
Look at the chart below. It plots the U.S. personal saving rate, measured as a percentage of disposable income.
In late 2021, the U.S. personal saving rate was 7.5%. Since then, it has dropped to 4.4%. This represents a decline of more than 40%.
(Source: “Personal Saving Rate,” Federal Reserve Bank of St. Louis, last accessed April 26, 2023.)
If Americans are saving less money, it means they have a smaller financial cushion against unforeseen events. What if they lose their jobs? Will they be able to pay their mortgages or car payments?
Americans Lose Close to $9 Trillion in Stocks & Mutual Funds
Adding more to the misery, Americans’ investment assets have lost a lot of value.
See the chart below. It plots the value of the stocks and mutual funds held by U.S. households.
It’s gruesome. Between the fourth quarter of 2021 and the fourth quarter of 2022, American households lost close to $9.0 trillion in stock and mutual fund value. This is no small number. Keep in mind that these assets are used for retirement and rainy days.
(Source: “Households; Corporate Equities and Mutual Fund Shares; Asset, Market Value Levels,” Federal Reserve Bank of St. Louis, Last accessed April 26, 2023.)
Aside from stocks and mutual funds, you can’t ignore one of Americans’ biggest financial assets: homes. As interest rates have increased, home prices have started to come down.
Worst-Case Scenario for U.S. Economy Could Be Ahead
Dear reader, given how American consumers are doing, I can’t help but be pessimistic about the U.S. economy in 2023. I fear that the upcoming recession could be severe. How can the economy bounce back if the major factor behind all the previous economic recoveries (consumers) is struggling?
Recessions don’t end by themselves. The U.S. economy needs help from the Federal Reserve and the U.S. government.
The problem is that the Fed and the government already took some extreme measures to deal with previous recessions. To fight another recession, they might have to take even more extreme measures. By this, I mean the Fed printing more money and lowering interest rates, and the U.S. government borrowing immense amounts of money.
I have to wonder, if the Fed and government do more to fight the upcoming recession than they did with previous recessions, when the economy starts to improve, will we get hyperinflation?
