Sassy Finance: Will the US Enter a Recession in 2023?

After a hard day’s work, you throw yourself onto the sofa and pop the TV on to turn your brain into mush. Ahh, it’s time to forget your role in the capitalist machine. Or so you’d hoped. It turns out that a new year brings even more headlines about a US recession.

That’s not very relaxing, is it?

Your escapism thwarted, the pessimistic economists say, “A recession’s definitely going to happen this year!”

But iiiiis it?

Let’s look at the signs that the United States is heading towards a recession, but let’s also see if anything’s going right in this hellscape.

What is a recession?

We hear the word ‘recession’ all the time from economists, but what does it really mean?

A recession is a period of significant decline in economic activity.

In simple terms, money things have gone tits up.

A recession leads to several things:

• Increased unemployment as businesses try to save money
• Stock investors panicking, crashing the markets as they sell
• Interest rates fluctuating
• Bonds becoming king
• Everyone spends less money. (Well, apart from the rich people who can afford to buy luxury goods instead of paying their workers a living wage, so they can’t afford to heat their homes #eattherich)

Signs that a recession is coming

Bear markets

The three major US indexes have seen crushing blows to impressive 2021 gains. The S&P 500 and Nasdaq Composite are down 15% and 27%, respectively. Thankfully, the Dow is doing a little better at only -5%, but that’s hardly enticing to invest in.

The stock market isn’t the only problem. Bonds aren’t very inviting at the moment, either.

The Fed aggressively increased interest rates, creating higher yields (return on your money). While a higher return sounds great, it’s not so great in the short term for existing bondholders, as this also means bond prices have gone down. So if they need that money now, they’d have to sell at a loss.

And thanks to inflation, cash is losing value by the second, so it all feels a little lose-lose. In summary, things are a bit shit on the investment front.

An inverted yield curve

Yeah, I know, more tedious economist speak. In basic terms, this is when bonds’ long-term interest rates are lower than short-term rates. That’s the bond thing we just talked about.

According to experts, this is a reliable indicator of a recession. CNN says the curve “has correctly predicted almost every recession over the past 60 years.” Uh-oh.

Decreased personal savings rate

The personal savings rate is what it sounds like: how many pennies you can save after you’ve paid your landlord’s exorbitant rent and raided the reduced section in your local supermarket. (Getting a little too autobiographical now.)

Living my best life! ♬

Understandably, with inflation tightening everyone’s belts and mortgage interest rates rising, the rate dropped to 2.4% in November 2022. Pre-pandemic, the rate was 9.3%, so people had more money to save and invest.

More optimistic signs

Personal consumption expenditure

While inflation impacts everyday expenditure like food, personal consumption expenditure (PCE) has continued to grow steadily this year. Maybe everyone is comfort eating?

PCE is a measure of inflation that includes all consumable goods and services bought by US households. It’s a key driver of gross domestic product (GDP). During a recession, GDP decreases as people can’t afford to buy fun things. Or anything at all, actually.

GDP

In Q1 and Q2 of 2022, US GDP wasn’t looking too healthy. Thankfully, in Q3, GDP increased to 3.2%. If we’d seen a third quarter of declining GDP, it might have indicated a recession was coming. But for now, maybe we can have a little hope.

Unemployment rates

Businesses struggled with the rest of us when we were figuratively locked in our houses during the pandemic. Unemployment climbed to a whopping 14.7% from 3.5%. Now, unemployment rates have returned to pre-pandemic levels.

Safeguarding against recession

Diversifying your assets is a vital part of safeguarding. This means being a diamond-handed GME ape can’t be your entire personality. An important part of any investment strategy is ensuring you can weather the storm, so you shouldn’t invest all your money in one place.

Allocating your assets according to your risk profile means you’re less likely to panic sell if you see a 45% drop. Selling during a huge drop crystallises your losses, and you wave goodbye to that money. Investing in the stock market with a long-term mindset is a great way to avoid this.

All in all, a recession is inevitable; it’s a simple fact of capitalism. We can’t know for certain when a recession will strike, so we can’t spend our whole lives being terrified. The best thing to do is diversify your investments and live your life. And maybe turn the news off for the sake of your mental health.