Warren Buffett is the latest expert to warn we could be entering difficult economic waters. Find out what’s behind the latest recession warnings.
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If I had a dollar for every article sounding the alarm about a recession, I might be able rival Warren Buffett’s billions. Indeed, the investing guru recently joined the ranks of financial experts who are pessimistic about the U.S. economy. So why are so many people warning again that we might be about to hit a recession?
Here are three of the biggest reasons economists are concerned.
1. Debt ceiling debates
The debt ceiling is the amount of money the U.S. is authorized to borrow. It is a bit like the limit on your credit card, except on a national level. The U.S. has already reached its limit and the Treasury is asking lawmakers to raise the ceiling so the government can meet its obligations. Those obligations include paying benefits such as Social Security and Medicare, as well as federal salaries such as those for military personnel, employees, and contractors.
Right now we’re in a kind of twilight zone. The U.S. can’t borrow more money, so the Treasury is using so-called “extraordinary measures” to keep things afloat. That involves moving money around in certain Federal funds to create more breathing room. It warns that these measures will only last so long and estimates the U.S. could find itself unable to pay its bills as early as June.
The challenge is that lawmakers in Washington need to agree to raise the debt ceiling. And right now they don’t agree on how that should happen, raising fears of a default. While extremely unlikely, if a default did happen it would be unprecedented and extremely damaging. Moody’s Chief Economist, Mark Zandi warns, “A default would be a catastrophic blow to the already fragile economy.”
2. Inflation and the associated interest rate hikes
Inflation has hit many Americans’ bank accounts hard, and the Federal Reserve is determined to get it under control — even if it means triggering a recession. It has been aggressively raising interest rates for over a year, and the most recent rate hike took interest rates to a 16-year high.
High interest rates mean it’s more expensive to borrow money. In theory this causes businesses and consumers to spend less and cools the economy. Unfortunately, rate hikes are a blunt instrument and it often takes time for the Fed’s actions to land. As a result, while the rate hikes have not yet led to a U.S. recession, a number of economists believe it will. Indeed, some argue that every attempt to control inflation since the 1950s has triggered a recession and that this scenario is no different.
3. The banking crisis
Confidence matters in both banking and the economy. And confidence in the banking system has taken some serious knocks this year — with the collapse of Silicon Valley Bank creating shockwaves that are still being felt today. First Republic was the latest bank to fail, and it isn’t clear if other regional banks could still be at risk.
JPMorgan’s Jamie Dimon says the crisis is over. It’s also reassuring to know that bank customers have not lost any of their deposits. However, the FDIC warns that the risk of bank runs remains high, particularly because of the combination of large concentrations of uninsured deposits and the speed of internet banking. Other financiers suggest there are also dangers associated with making big banks even bigger and eroding the space for regional banks.
What it means for your finances
It’s worth noting that experts do not agree on the likelihood of a recession. A lot depends on which economic indicators you look at, and they’re not all pointing in the same direction. For each expert who says it’s all but inevitable, you’ll find another who says it’s unlikely.
The good news is that the steps you can take to recession-proof your finances will stand you in good stead no matter what happens to the economy. For example, if you have six months’ worth of living expenses in an emergency fund, it will cushion you against a recession-related job loss or a medical crisis that has nothing to do with the economy. Put your emergency cash into a high-interest savings account that’s easy to access.
Similarly, if you carry high-interest debt, the sooner you make a plan to tackle it, the better. Not only do higher interest rates make it more expensive to owe money, but that debt will eat into your available income and make it harder to meet other financial commitments. As individuals, there isn’t a lot we can do about an impending recession, but we can try to make our finances more resilient to withstand one.
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