4 reasons the economy seems to be falling apart and what to do about it

Almost anyone who wants a job can have one. The economy is so hot that prices are rising faster than at any time since the 1980s. The real estate market is on fire. Consumers are spending like crazy.
Yet we keep hearing the word “recession” like it’s 2007 over and over again. What gives?

The truth is that we are probably not in a recession right now (although it is possible), but there are many signs that one is just around the corner.

Signal 1. The Fed is raising rates

Inflation has been rampant, and the Federal Reserve’s tool to combat rising prices lies in its ability to set interest rates higher. That makes loans more expensive and slows down the economy, on purpose.

The problem is that the Fed was too late in raising rates. Inflation was a growing concern throughout 2021, but the central bank only started raising rates in March 2022. So the Fed needs to catch up and take much more drastic action than if it had started raising rates. rates last year.

Last week, the Fed raised rates by half a percentage point, the biggest rate hike in 22 years.

Fed Chairman Jerome Powell said this month that the central bank would continue to raise rates by half a percentage point at the end of each meeting until it is satisfied that inflation is under control, and then the Fed would continue to raise rates by a quarter point for a while.

The Fed is convinced it can raise rates without plunging the economy into recession. But that so-called soft landing has proven elusive in the past, and many Wall Street banks believe the Fed will engineer a recession to outpace inflation.

Signal 2. The stock market is in sell-all mode.

Extreme fear is the prevailing sentiment on Wall Street this year. CNN Business’ Fear & Greed Index is at a measly six out of 100.
More than $7 trillion has been wiped off the stock market this year
After hitting all-time highs in early January, the stock market has lost nearly a fifth of its value, sinking stocks close to bear market territory. The nasdaq (COMP.) is already deep in a bear market. More than $7 trillion has evaporated from the stock market this year.

Worried that higher interest rates will erode company profits, investors have turned to exits.

That’s bad news for people’s retirement plans. It’s also unwelcome news for a number of investors who rely on the market for income, including day traders who have counted on virtually straight-line stock market growth for most of the decade. And it’s not good for consumer sentiment, either.

Although a minority of Americans actively invest in the stock market, when they see a sea of ​​red next to the CNN ticker or on their phone screens, that has historically given people pause. Consumer confidence fell to its lowest level in 11 years in May.

That’s potentially bad news for the economy, because consumer spending accounts for more than two-thirds of US gross domestic product.

Sign 3. The bond market

When investors aren’t that excited about stocks, they’ll often switch to bonds. Not this time.

Safe US government Treasury bonds are selling. When bond prices fall, yields rise, with 10-year Treasury yields topping 3% this month for the first time since 2018.
How long will inflation last?  The answer is in the past.

That usually happens when the Fed raises rates: the higher cost of borrowing makes the bonds less valuable when they come due, so a higher interest payment on the bonds (the yield) will help offset and make them more attractive. for investors.

Bonds have also sold off as the Federal Reserve decided to unwind its huge portfolio of Treasuries that it had been buying since the pandemic to prop up the economy.

As bonds have sold off and investors have become more fearful of an economic downturn, the gap between short-term and long-term bond yields has been narrowing. Yields on the two-year Treasury note briefly rose above those on the benchmark 10-year note in March for the first time since September 2019. That so-called yield curve inversion has preceded every recession since 1955. , producing a “false positive” only once, according to the Federal Reserve Bank of San Francisco.

Sign 4. Chaos around the world

None of this is happening in a vacuum. Russia continues its deadly invasion of Ukraine, which has choked off supply chains and sent energy prices skyrocketing. China continues to lockdown some of its largest cities as Covid cases remain high. And labor shortages have pushed up wages and hampered the normal flow of goods around the world.
Russia continues to threaten European countries by shutting down their energy shipments, which could plunge the EU economies into recession. China’s economy has slowed dramatically as it keeps workers at home as part of its zero covid policy.

What happens abroad could also affect the United States, hurting the US economy at the worst possible time.

To do

OK, so a recession could be coming soon. This is what not do: Panic.
Even if a recession is inevitable, there is no telling how severe it will be. But it never hurts to plan for the worst. Here are some ways financial advisors say you can protect your finances from a recession.

Block a new job now: With ultra-low unemployment and plenty of vacancies, it’s a market for job seekers. That could change quickly in a recession.

Take advantage of the housing boom: If you’ve been on the fence about selling your home, now may be the time to make a list. Home prices in the United States are up almost 20% year over year, but mortgage rates are also rising, which will eventually curb demand.

Set aside some money: It is always a good idea to have liquid assets (cash, money market funds, etc.) to cover urgent needs or unexpected emergencies.

Finally, some sage advice for any market: Don’t let your emotions get the better of you. “Stay invested, stay disciplined,” says certified financial planner Mari Adam. “History shows that what people, or even experts, think about the market is often wrong. The best way to achieve your long-term goals is to stay invested and stick to your allocation.”

— Allison Morrow and Jeanne Sahadi of CNN Business contributed to this report.

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