This story is part ofCNET’s coverage of how to make smart money in an uncertain economy.
After almost a year of fighting, inflation is finally showingas signaled in this week’s CPI report. In response, the stock market rallied, and investors hoped the Federal Reserve might finally come around at the meeting next month.
While that seems like good news for the economy, it’s important to note that prices are still rising – they just aren’t rising at the rate we’ve seen over the spring and summer. This could indicate that both the Fed’s rate hikes and the overall improvement in the supply chain are starting to lower the rate of inflation. But it’s still too early to know if inflation will actually fall.
Widespread concerns about a recession remain, although experts are predicting it will be milder than many initially thought. But as prices remain high and interest rates soar, it feels like a pun on whether we’re facing an official recession. And with more layoffs in the news, it’s clear Americans are struggling on a day-to-day basis.
Here’s what to expect in times of decline, what you need to know about layoffs and interest rates, and a few tips, and make wise money moves in uncertain times.
What happens during a recession?
It’s always helpful to go back andso we can manage our expectations. While every recession varies in length, severity, and impact, during economic downturns we tend to see more layoffs and a rise in unemployment. Access to the credit market could also become more difficult and banks could be slower to lend because of concerns about default rates.
Just as the Federal Reserve continues to doTo try to curb inflation, we will see the cost of borrowing—for example, mortgages, car loans, and business loans—rise even more sharply. So even if you The interest rate will be higher than last year, making it harder for households to borrow or pay off debt. We are already seeing this in the housing market, where the average rate has dropped to a is around 7%, with some buyers seeing rates well above 7% — the highest since 2009.
During a recession, when interest rates rise and inflation cools, the prices of goods and services and ours fall, but it all depends on the labor market and wages. We may also be seeing a surge in entrepreneurship, as we saw in 2009 during the Great Recession, as the new unemployed often look for ways to turn a small business idea into a reality.
Should we expect further layoffs?
With layoffs at well-known companies such asand , Job security is the top priority for many. Currently, the official Bureau of Labor Statistics unemployment rate is 3.7%, which is considered low. The Federal Reserve expects the unemployment rate to rise to 4.4% by the end of 2023, suggesting more layoffs are on the horizon.
But the official unemployment rate doesn’t tell the whole picture, as CNET editor Laura Michelle Davis noted in a. “People who have given up looking for work are not even counted as unemployed, while part-timers or freelancers who may only be able to find work for one hour a week—not financially viable—are treated as employed,” Davis wrote. According to the Ludwig Institute for Shared Economic Prosperity, the true percentage of Americans battling unemployment or underemployment is closer to 22.3%.
During the Great Recession, when unemployment peaked at 10% according to the BLS measure, it took an average of eight to nine months for the unemployed to find a new job. So now might be the time to review your emergency fund if you think you’re running a deficit. If you’re unable to cover expenses for at least six to nine months, which is difficult for most people, try to accelerate savings by cutting expenses or. It’s also a good time to update your resume and connect with influential people in your professional and personal network. if make sure you apply for unemployment benefits right away and get your health insurance covered.
If you’re self-employed and concerned about a potential downturn in your industry or losing customers, explore new revenue streams. Also try to increase your cash reserves. Again, if previous recessions have taught us anything, it’s that cash opens the door to choice and greater control in a challenging time.
Will interest rates on loans and debt continue to rise?
Although this week’s CPI data does show some good news, prices are still rising… which means another rate hike is on the horizon in December, although it may not be as sharp as the last few. Expect interest rates on mortgages, credit cards, and loans to rise for a while longer, and your monthly payments to become more expensive.
Paying off your debt now, when you can, is the best way to avoid paying interest. If you can’t pay off your debt in full, ask your lenders and card issuers about itor see if you can refinance or consolidate debt .
In past recessions, some financial institutions have been reluctant to lend as often as in “normal” times. This can be worrying if your business relies on credit to expand or if you need a mortgage. It’s time to pay close attention to yours , which is a big factor in a bank’s decision. The higher your score, the better your chances of qualifying and getting the best prizes.
Should I stop investing in my 401(k)?
The stock market has been in a spiral for most of 2022, although it experienced an uptrend this week amid the better-than-expected inflation report.
No matter what happens next weekif you can afford it Avoid panicking and cashing out just because you can’t stand the volatility or watch out for the down arrows .
My advice is to stop knee-jerk reactions. This can be a good time to review your investments to ensure they are well diversified. If, for any reason, you suddenly notice a change in your risk appetite, speak to a financial professional to determine if your portfolio needs adjusting. some on the internetPlatforms offer customer service and can offer orientation.
Historically, it pays to hold on to the market. Investors who cashed out their 401(k)s in the Great Recession missed a rebound.
The only caveat is if you desperately need the money you have in the stock market to pay for an emergency expense like a doctor’s bill and there’s no other way to afford it. In that case, you might want to check. If you decide to borrow money from your retirement account, make a commitment to pay it back as soon as possible.
Should I wait to buy a house?
Despite a price decline this weektiptoed over the 7% interest rate threshold. And with house prices still high, buying a home could be more expensive than renting it right now. A report by real estate consulting firm John Burns in April examined the cost of owning versus renting in the US and found that owning costs $839 more than renting a month. That’s nearly $200 more than at any point since 2000.
Fixed rates on 30-year mortgages have essentially doubled since last spring, which has helped— but competition among buyers is fierce due to historically low inventories. Cash offers and bidding wars continue in many markets. if you were If you have worked in vain for the past month or year, you may feel exhausted and depressed.
Don’t be hard on yourself. You can’t go wrong if you haven’t placed the winning bid yet. While it’s true that a fixed-rate mortgage can give you more predictability and budget stability, as long as inflation continues to outpace wages, there could be some upsides to renting for now. For one, you’re not buying a home in a bubble market that some economists say is about to burst. If you have to offload the house in a year or two – during a possible recession – you risk selling at a loss.
Second, renting allows you to keep the money you would have spent on a down payment and closing costs, and helps you stay more liquid during times of great uncertainty. So you can turn around faster and secure your finances in a downturn. Remember: cash is power.
My final note is that it’s important to remember that recessions are a normal part of the economic cycle. Long-term financial plans will always experience some downturns. Since World War II, the US has had about a dozen recessions, typically ending in a year or less. In contrast (and to give you better news) periods of expansion and growth are more frequent and longer lasting.