Make Ends Meet: Lower consumer spending could trigger recession soon
LOUISVILLE, Ky. (WAVE) - Is a new recession warning flashing? That question has been asked monthly since the beginning of the pandemic.
What we do as consumers always affects what happens in our world and in our own homes. Marcus Warren, President of Warren Wealth Management & Tax Planning, stresses consumers are the backbone of the U.S. economy.
Recession fears have been on the rise since the COVID-19 pandemic turned the world upside down. With the problems of the pandemic came President Joe Biden’s plan to provide direct relief with the American Rescue Plan.
“It helped us in the short term,” Warren explained. “There was a lot of money that was pumped into the economy during the pandemic.”
In other words, people had money to spend and money to save. COVID-19 restrictions loosened, and life began to return to some normalcy.
“People had a lot of money in savings and so when the doors opened after the pandemic you saw a lot of people go out and spend money,” Warren stressed.
That spending kept the recession at bay. Now persistent inflation, high gas prices and higher interest rates have consumers holding on to more of their money. Things have changed since the beginning of the pandemic, so I had to ask are we in a recession now?
“No, we are not in a recession,” Warren answered. “A recession is when we or Americans see two consecutive quarters of economic decline. We’re seeing consumer spending start to slow and consumer spending is 70% of economic growth.”
Warren shared that according to a summer survey, rejection rates for credit applications have increased sharply in the last few months, especially for people with lower credit ratings. Loan approvals and spending are now slowing.
”When that tends to slow down that’s when you can see a recession,” Warren stressed.
2008 was a tragic time for many Americans. In what’s been called the Great Recession of 2008-2009 not only did many Americans lose their jobs, but many also lost their homes and their life savings. It was the worst economic downturn in the U.S. since the Great Depression from 1929-1939.
”Lower consumer spending and credit tightening could lead to a possible recession here pretty soon,” Warren explained. “Of course, that has that cyclical effect that affects everything or that snowball effect that starts to affect the economy.”
Instead of panicking, Warren suggests recession-proofing your life as much as possible. There are steps you can follow every day to keep your finances stable.
“You need to make sure that your savings are still high,” Warren stressed. “That you at least have that emergency fund.”
The rule of thumb is to put away at least three to six months’ worth of expenses. You should develop habits that can protect you in lean or plentiful times by living within your means, diversifying your investments, always keeping your credit score high and having multiple sources of income.
“You should always have at least some type of savings and if you don’t, you could find yourself in some trouble,” Warren exclaimed.
Recessions are officially declared by the National Bureau of Economic Research. We talked about things to do if we were in a recession. There are some things you should not do.
- Do not co-sign for someone in a recession. The risks are higher if they lose their job. You end up stuck with that bill.
- You may not want to assume new debt like a car loan simply because of layoffs or financial problems in a recession.
- Think twice before you quit your job. Finding a job in a recession can be much harder to do.
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