Ready for a Recession?

Many articles and column inches have been written about an impending recession facing the United States. Though the definition of a recession seems to be a hot-button topic of late, the reality is no one knows whether we’re in for an economic downturn. Forecasting is an excellent way to make a fool of yourself.

So instead of suggesting the likelihood (or unlikelihood) of a recession, I’d like to offer this: If we ultimately experience a recession, consumers are in a far better position to weather the economic downturn than they have been in decades.

First, let’s consider the average consumer’s balance sheet. Consumers represent some 70% of the economy and hold about $17.5 trillion in cash, up from $13 trillion at the beginning of 2020 and $10 trillion in 2015, according to the data from the Federal Reserve. A recent Wall Street Journal article states, “…U.S. households never experienced anything like the increase in cash they have experienced over the past two years, and this remains true even after adjusting for the run-up in inflation.”

And this isn’t just a “rich get richer” story. While people in the top 10% of wealth increased their cash and cash equivalents by about 32% in roughly the same period, those in the bottom 50% increased their cash by 45%.

That’s just cash. If we look at total household wealth, Americans went from $109.9 trillion in Q4 2019 to $141.1 trillion at the end of Q1 2022, roughly a 30% increase in two and a half years!

What about debt? All this extra cash doesn’t do households any good if they’re swimming in debt, right? In 2008, at the market’s peak of “over exuberance,” household debt as a percentage of disposable income sat at about 13%. That means, of the disposable income households earned, about 13% went to paying back debt. Today that number sits at about 9.5%. That means either Americans are making more money, having less debt, or some combination of the two.

If we consider mortgage debt, Americans were spending about 7.2% in 2008. Today it’s 3.9%. Two primary reasons: First, we learned our lesson about borrowing and lending following the mortgage crisis, and second, the low inflationary environment that followed allowed those with mortgages to refinance at historically low interest rates.

Even with a relative slowing of housing prices, most borrowers have significant home equity, a fixed finance rate, and plenty of cushion if their values continue to drop. For example, June to July brought about a $10,000 dip in the price of an average single-family partially due in part to persistently high interest rates. But even with high rates weighing on home buyers, they kept buying faster than a year ago. As a result, a typical home now sits on the market for only 14 days.

That’s a lot of data and numbers, but they all point to a similar conclusion: overall, Americans seem to be in a good financial spot. And yet, consumer sentiment is at lows not seen since the 80s. People don’t feel confident about their position. Why is that?

Inflation is undoubtedly a part of it. Prices for the goods and services we all use continue to climb to rates unheard of only a few short years ago. Whether it’s gasoline, food, or electricity, we all have to pay more for the things we need to survive. While the month-over-month inflation increase may have been low this month, the reality is that many individual categories continued to climb. Whether they will continue to increase or begin to slow is another hot topic. I’m old enough to remember the lasting bouts of inflation we experienced in the early 80s, which persisted through four presidential administrations. Inflation tends to stick around.

But our country has a unique ability to innovate and compete that tends to counterbalance stubbornly high inflation. Consider video conferencing as an example. COVID rapidly sped up the adoption of tools like Zoom that allowed for dramatic reductions in travel and the costs of meeting in person. For example, our office went from using this technology with a few of our out-of-state clients pre-COVID to occasionally using it with clients who live within walking distance from our office building simply because they prefer the convenience. And the first 45 minutes are free! This is only one example of deflationary innovation that will eventually help us turn the tide on inflation, but it will take time.

When looking at the broad economic data, I’m encouraged. Households seem to be okay. But I’m aware that extensive data like this can be misleading. If and when a recession hits, it will be painful. Jobs will be lost, savings will be tapped, and people may need to make sacrifices. That’s why it’s so important to consider your financial plan. Are you prepared for a recession? Do you have adequate cash reserves in an emergency or unplanned layoff? Has your wealth increased over the past few years? What about your expenses? We all need to turn our attention to these questions instead of fixating on whether we are or are not in a recession.

Big data is great, but it comprised of individual stories, backgrounds, and situations. Where do you stand? Are you ready for a recession?