Key takeaways
- We haven’t officially entered a recession in 2023 – but experts predict a 70% chance of one hitting before years’ end
- During a recession, the average person (i.e., you) is at higher risk of unemployment and financial squeezes
- Others impacts of economic downturns include price and interest rate changes, decreased healthcare coverage, less credit access and increased stress
Recession, recession, recession.
You can find the word plastered on every newspaper, in every talk show hosts’ mouth and bouncing around concerned investors’ minds. And yet, for all this talk of recession, the United States hasn’t actually entered one yet.
Still, constant concerns about recession are in themselves concerning. The more everyday investors and consumers worry about an economic downturn, the more likely they are to pull back spending. (Ironically, increasing the chances that a recession will head their way.)
So far this year, economists can’t fully agree on if, when, or how bad a recession could hit.
A Bankrate poll found a 64% chance of a recession by the end of 2023.
One Bloomberg survey finds a 70% chance of recession in the next year.
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Goldman Sachs sees the economy coming out a little bruised; Barclays Capital sees 2023 suffering the worst global economy in forty years.
(Personally, we see a potential recession as a great time to advance your core investment strategy with Q.ai’s Active Indexer Investment Kit. Or, for an even more diversified play, the Global Trends Kit that seeks smaller downsides and higher returns.)
In other words, there’s no consensus around the specifics, or even possibility, of an economic downturn. What is indisputable is that the topic is front of everyone’s mind.
With global recession worries sitting perpetually high, it’s normal to be nervous about your finances. But how does a recession affect the average person – including retail investors like yourself – really?
Let’s find out.
What does a recession mean for the average person?
Each recession results from a unique set of factors, which means that – while they often share broad similarities – the specifics can vary widely. Here’s what a coming recession could mean for the average person in today’s unusual economic environment.
Fewer jobs and higher unemployment abound
One unfortunate truth of recessions is that millions of people often lose their jobs. As spending slows and the economy shrinks, business profits go down, too. To keep their profit margins afloat, they often slow hiring and start firing to trim the budget.
Even the Covid-19 recession, despite being the shortest in America’s history, saw 22 million people put out of work. During the Great Recession of the latter 2000s, unemployment over doubled.
As unemployment rises, companies are also less likely to hire you elsewhere, making finding a new job more challenging. For already-struggling Americans, that means regaining your financial footing is even tougher than usual.
However, it’s worth noting that the jobs market remains abnormally strong given prevailing economic concerns. In 2022, the economy added 4.5 million positions, while new unemployment claims plunged to historically low levels in December.
But with the Fed on the interest rate warpath, those numbers may reverse themselves soon enough. Fed officials hold that unemployment will rise from 3.5% to 4.6% this year, consistent with recession-level numbers. And already, many major tech firms have announced massive job cuts as the bloated industry slims down.
You lose bargaining power
One side effect of a slimmer jobs market is that workers lose their bargaining power.
When fewer businesses are hiring, employers can set lower wages and smaller benefits packages. Bonuses and raises may take a hit. In the coming recession, employees may even lose the ability to request flexible schedules or remote work arrangements.
Underemployment can also rise, where Americans work fewer hours per position so employers can cut costs.
If a worker elects not to accept those conditions, they may struggle to find something better – or anything at all – elsewhere.
Health insurance coverage can dwindle
The U.S. is unusual in that a substantial portion of our workforce relies on their jobs for healthcare access. That means that when recessions come around, people find their healthcare access swept out from under them.
For instance, Census Bureau data shows that the bulk of the U.S. population had employment-based health insurance in 2020. When the recession hit, 7.7 million Americans and 6.9 million dependents lost coverage between February and June 2020.
While private insurance access exists, it’s far more expensive when your employer isn’t footing the bill. As such, many people who lose insurance during recessions remain uninsured until they find a new job. And though you save on insurance premiums, if a medical emergency arises, you’ll probably pay more out of pocket.
Your budget gets tighter
Even if you keep your job, pay raise and health insurance, you’ll likely tighten your budget during a recession.
For one thing, prices may get sticky during a recession as businesses attempt to bolster dwindling profit margins. In the current economy, ongoing supply chain issues mean that everything from eggs to computers are more expensive than ever.
Meanwhile, higher interest rates are slamming consumers from all sides, jacking up the total cost of buying a house, car or even groceries on credit. These rates are predicted to continue rising until the Fed is satisfied that high inflation has been beaten back.
And beyond all that, it’s wise to put a large financial cushion between yourself and the potential for economic ruin.
Your portfolio will (probably) take a hit
Recessions and the stock market are often linked in intricate ways. Unfortunately, one of these links is that even the specter of recession can lead to a bear market before the economy actually declines.
As consumer spending slows and businesses struggle to bump profits, investors lose confidence in the economy. Some may even preemptively liquidate their portfolios as recession fears, inflation and/or interest rates rise.
While this move may protect their earnings if done at the right moment, timing the market this way is incredibly risky. For some investors, a liquidation may protect their profits – for others, this move just cashes out their losses. Cashing out also means that when the market begins to recover, your money won’t be there to ride the upside.
In other words, it’s often best to follow your long-term investment strategy through to the other side. You’re more likely to see preferable outcomes by avoiding paper losses than realizing those losses to “protect” your portfolio.
Credit access shrinks
Another way recessions affect the average person is that credit access all too often declines.
Even if you have the income to support a loan now, lenders are warier of handing out money when everyone’s job security is on the line. They may more heavily scrutinize your financials, credit score and credit history.
Decreased access to low-interest credit can force consumers to put off major purchases like real estate, cars or household appliances.
Increased stress all around
One of the most prevalent ways that recessions affect the average person is simply that stress goes up.
It doesn’t matter if you’re comfortable in your job security and have a hefty financial cushion, or if you’re struggling to make ends meet and have $100 in your savings account. When the economy wavers, people get nervous – and that’s more than okay.
While there’s no one-size-fits-all answer, the best thing you can do is stick to your financial plan as best you can and keep on truckin’ until the recession runs its course.
How to prepare for a possible recession
Recessions can affect the average person in myriad ways. It’s important to be as prepared as possible for what they might throw at you. If you’re not sure where to start, consider these stepping stones:
- Boost your emergency fund to hold at least three months’ worth of living expenses
- Trim any unnecessary expenses by rate shopping insurance and cell phone plans, slashing subscriptions you don’t use or eating in more often
- Pay down your debts more aggressively to avoid higher interest rates later
- Diversify your income with a side hustle, part-time job or income-producing investments
- Improve your employability by taking employer-sponsored courses or acquiring new skills
- Refresh your resume – just in case
Investing during a recession
Another key to making it through a recession not just unscathed, but stronger than ever, is by investing when you can.
Recessions are renowned for their increased stock market volatility as investors respond to every little blip in the news. And yes, it’s likely that your portfolio’s value will decline. In fact, we’re counting on it.
Think about it this way: Just because the price of quality assets declines during a recession doesn’t mean those stocks are less valuable. It means that they’re trading at less valuable prices because investors are nervous. But when the recession ends and the economy recovers, high-quality stocks will recover right along with it.
For investors who buy in at a discount, that means your future profit potential goes through the roof. When everyone else is selling out of fear, you have an opportunity to invest now and cash out later.
The bottom line
Recessions are hard on everyone – and that includes you. With potential job losses on the horizon, the best thing you can do is secure your finances now and wait out the storm. Generally, that includes holding tight to (or even expanding) your investment portfolio to catch future upsides.
Of course, you don’t just want to invest in “what ifs” – it’s still important to hedge your portfolio in other areas.
For investors seeking diversification and defensive positions in uncertain economies, Q.ai’s diversified range of Investment Kits hit the spot.
For instance, our Active Indexer and Global Trends Kits make excellent core holdings for a diversified approach to long-term investing.
But if you want to hedge your bets a little more pointedly, we also offer a top-notch Inflation Kit to capitalize on higher prices.
And for the traditionalists among us, our Precious Metals Kit lets you hedge with the oldest stores of wealth.
Top it all off with Portfolio Protection to limit losses and protect profits, and you can rest easy knowing that Q.ai has your back no matter the recessive headwinds.
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