As inflation continues to soar and the stock market experiences its worst first half of the year since 1970, economists and financial experts worry that a recession might not only be likely, but inevitable. Technically, the country is in a recession when gross domestic product, the value of all goods and services produced during a specific period, falls during two quarters back-to-back. In the first three months of 2022, the US GDP dropped by 1.4%. The National Bureau of Economic Research, which makes the official call about a recession, meets later this month.

There’s also concern that the central bank — in an aggressive effort to tame inflation by slowing down the economy — could just be forcing the economy into a painful recession. Historically, to lower inflated consumer prices, the Federal Reserve raises the federal funds rate, which makes borrowing money more expensive. But this year’s three rate hikes, including the most recent, which was the largest in nearly three decades, haven’t made a dent in inflation. It sits at 8.6%, more than four times higher than “normal.”

Federal Reserve Chairman Jerome Powell acknowledged the risk of recession during a European Central Bank forum on Wednesday. But he also noted, “I wouldn’t agree that it’s the biggest risk to the economy. The bigger mistake to make … would be to fail to restore price stability.”

As we brace for the storm with recession fears ramping up, more of us are thinking about finances and employment. My So Money podcast audience sent in a number of questions related to recessions about how best to prepare, save, invest and make smart money moves in these uncertain times. Here’s a bit of guidance to help navigate this difficult financial period.

First, what might we see in a recession?

It’s always helpful to go back and review recession outcomes so that we can manage our expectations. While every recession varies in terms of length, severity and consequences, we tend to see more layoffs and an uptick in unemployment during economic downturns. Accessing the market for credit may also become harder and banks could be slower to lend, because they’re worried about default rates. 

As the Federal Reserve continues to raise rates to try to clamp down on inflation, we’ll see an even greater increase in borrowing costs — for mortgages, car loans and business loans, for example. So, even if you qualify for a loan or credit card, the interest rate will be higher than it was in the prior year, making it harder for households to borrow or pay off debt. We’re already seeing this in the housing market, where the average rate on a 30-year fixed mortgage was recently approaching nearly 6%, the highest level since 2009.

During recessions, as rates go up and inflation cools, prices on goods and services fall and our personal savings rates could increase, but that all depends on the labor market and wages. We may also see an uptick in entrepreneurship, as we saw in 2009 with the Great Recession, as the newly unemployed often seek ways to turn a small business idea into reality.

Should I expect layoffs?

With the unemployment rate sitting at 3.6%, the job market may appear to be, at least right now, the only stable part of the economy. But that’s likely to be temporary, as companies battling with the current financial headwinds — including inflation, rising interest rates and weakening consumer demand — have already begun to announce layoffs. According to Layoffs.fyi, a website that tracks job losses at tech startups, there were close to 37,000 layoffs from startups in the second quarter of 2022.

In the Great Recession, unemployment peaked at 10%, and it took an average of eight to nine months for those out of work to secure a new job. So now could be the time to review your emergency fund if you think there’s a shortfall. If you won’t be able to cover a minimum of six to nine months’ worth of expenses, which is hard for most people, see if you can accelerate savings by cutting back on spending or generating extra money. It’s also a good time to make sure your resume is up to date and to establish contact with influential individuals in your professional and personal network. If you are laid off, make sure to apply for unemployment benefits right away and secure your health insurance. 

If you’re self-employed and worried about a possible downturn in your industry or a loss of clients, explore new revenue streams. Aim to bulk up your cash reserves as well. Again, if previous recessions taught us anything, it’s that having cash unlocks choices and leads to more control in a challenging time.

Should I expect the interest rates on my debt or loan to go up?

As the Federal Reserve continues to raise interest rates to try to curb inflation, adjustable interest rates are set to increase — ratcheting up the APRs of credit cards and loans, and making monthly payments more expensive. Ask your lenders and card issuers about low-interest credit options. See if you can refinance or consolidate debts to a single fixed-rate loan.

In past recessions, some financial institutions were hesitant to lend as often as they did in “normal” times. This can be troubling if your business relies on credit to expand, or if you need a mortgage to buy a house. It’s time to pay close attention to your credit score, which is a huge factor in a bank’s decision. The higher your score, the better your chances of qualifying and getting the best rates. 

Should I stop investing in my 401(k)?

With stocks in a downward spiral, many want to know how a recession could impact their long-term investments. Should you stop investing? The short answer is no. At least, not if you can help it. Avoid panicking and cashing out just because you can’t stomach the volatility or watch the down arrows during a bear market.

My advice is to avoid making knee-jerk reactions. This may be a good time to review your investments to be sure that you’re well-diversified. If you suddenly experience a change in your appetite for risk for whatever reason, talk it through with a financial expert to determine if your portfolio needs adjusting. Some online robo-advisor platforms offer client services and can provide guidance.

Historically, it pays to stick with the market. Investors who cashed out their 401(k)s in the Great Recession missed out on a rebound. Despite the recent downtick, the S&P 500 has risen nearly 150% since its lows of 2009, adjusted for inflation.

The one caveat is if you desperately need the money you have in the stock market to pay for an emergency expense like a medical bill, and there’s no other way to afford it. In that case, you may want to look into 401(k) loan options. If you decide to borrow against your retirement account, commit to paying it back as soon as possible.

Should I wait to buy a home?

With mortgage rates on the rise and housing prices not cooling nearly fast enough, owning could be more expensive than renting right now. A report from the John Burns Real Estate Consulting firm looked at the cost to own versus renting across the US in April and found that owning costs $839 a month more than renting. That’s nearly $200 greater than at any point since the year 2000.

Fixed rates on 30-year mortgages have practically doubled since last spring, which has helped slow down offers and cool housing prices — but competition among buyers is still stiff due to historically low inventory. All-cash offers and bidding wars continue in plenty of markets. If you’ve been shopping for a home in recent months or the past year to no avail, you may feel exhausted and defeated.

Don’t be hard on yourself. You’re not doing anything wrong if you have yet to offer the top bid. While it’s true that a fixed-rate mortgage can offer you more predictability and budget stability, as long as inflation continues to outpace wages, there could be some bright sides to renting right now. For one, you’re not buying a home in a bubble market that some economists are saying is soon to burst. If you have to unload the home in a year or two — during a possible recession — you may risk selling at a loss.

Secondly, renting allows you to hold onto the cash you would have spent on a down payment and closing costs, and will help you stay more liquid during a time of great uncertainty. This allows you to pivot more quickly 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 declining periods. Since World War II, the US has had about a dozen recessions and they typically end after a year or sooner. By contrast (and to give you some better news), periods of expansion and growth are more frequent and longer lasting.

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It was revealed, in a survey carried out by the Lincoln Institute of Land Policy (LILP) in 2019, that 90 percent of the 200 cities around the globe that were polled were considered to be unaffordable to live in, based on average house price in relation to median income. The impact of COVID-19 has only worsened the housing crisis, and government stimulus packages designed to fend off economic disaster are unsustainable in the long term. The data from the LILP shows that although household debt might boost economic growth and employment in the short term, households are eventually forced to rein in spending to repay these loans.

This then results in debt damaging the economy in the long run, and therefore, affordable housing is ultimately beneficial for both homeowners and the economy.

The last half of 2020, and the first half of 2021, have both seen housing prices across the world dramatically increase; in America, prices rose by 11 percent during the period, the fastest pace in 15 years, while in New Zealand, house prices were up by 22 percent. As a result, many countries, including Italy and the US, implemented measures to protect mortgage holders against the risk of losing their homes. The reasoning behind this was because mortgages can go lower while wages are not rising, and many are becoming unemployed due to the pandemic.

The rise in house prices also coincides with the increased demand for more housing, as a result of a growing population and a shift in demographics. This demand for housing has been particularly present within city centers, where there are good transport links, and a surplus of public services.

Richard Florida, founder of the Creative Class Group, told World Finance that part of the reason for the housing crisis is because “housing has been financialized and turned into an investment vehicle, which has caused an oversupply of luxury housing and a lack of affordable housing.” Florida added to this that “home ownership has created challenges for our cities by restricting the supply of housing and creating a system that incentivizes those that make an investment.”

The decline in home ownership as a result of unaffordable housing has led to the economic benefits of home ownership being questioned even further. In rich countries in particular, home ownership has previously been glorified as the ultimate goal. However, it now seems that it is a dysfunctional concept at times, and has led to gaping inequalities, as Florida talks about, as well as inflaming generational and geographical divides.

The foundation of the problem

Prior to the pandemic, lack of affordable housing was already a major issue. A growth in luxury tower blocks in cities across the world contributed to this, with this increase being partially aimed at the rise of foreign investors. This consequently contributed to a shortage in housing for the low and middle-income people in these cities. Vancouver has been viewed in recent decades as a place abroad for the wealthy Chinese to keep their assets. This has led to an increase in how upmarket certain areas of the city are, which has subsequently decreased how affordable the city is to locals.

Hong Kong is another unaffordable city, having retained the title as having the world’s least affordable housing market for an 11th consecutive year in 2020, with the average price for a home a staggering 20.8 times the annual household income. Although there is a public housing scheme to try and combat this issue, it unfortunately offers little compensation to tackle this sizeable disparity, with a current waiting time of five and a half years.

Hong Kong’s home ownership scheme (HOS) does not improve on this, as the chance of being successful with this government initiative is only 1.63 percent. Tokyo is one of the few cities to have kept up with the increasing housing demand for all classes, but this can largely be explained by its deregulated housing policies, which mean that in this city there are no rent controls, and fewer restrictions on height and density. Japan has consistently been building nearly one million new homes and apartments each year for the last decade.

Shortage of houses

In the US, house prices have increased by nearly 40 percent since 2000, making the median home in 200 US cities $1m. Home ownership has become unattainable for the vast majority of the population. This difficulty is also highlighted through the National Low Income Housing coalition, who found that a renter working 40 hours a week and earning minimum wage cannot afford a two-bedroom apartment in the US. One of the reasons for the shortage of new houses is due to the exclusionary zoning laws, with some areas of the US having neighborhood bans on new developments. There are also rules to establish minimum lot sizes, or requirements to include a certain number of parking spots per development.

Most recently, corporate relocations during the pandemic have contributed to dramatic surges in a demand for housing for particular reasons. At the end of 2020, Elon Musk announced that Tesla was moving to Texas, which consequently led to a boom in the Texas housing market. The rise in the cost of construction materials has also contributed to a shortage of new houses globally. The cost of home building materials has increased as a result of higher tariffs emerging from the ongoing trade war, with increased tariffs being placed on imported steel, aluminum and other building materials.

According to the Bureau of Labor, the cost of raw materials in the US has risen as high as 20.2 percent since the financial crisis. The lack of construction occurring during the pandemic has also contributed to this pre-existing issue, with output falling in April 2020 by 40 percent in the UK, and by 30 percent in the US. It will continue to take time before global residential construction reaches pre-COVID-19 volumes.

Tackling the housing crisis after COVID

Post-COVID, there is the hope that globally we can move forward on the critical housing targets of the UN’s Sustainable Development Goals (SDG). Goal 11 is to ‘make cities and human settlements inclusive, safe, resilient and sustainable,’ and new housing projects should bear this in mind when starting new construction projects, particularly in cities. In addition, more consideration for the wellbeing of citizens must be given over the desire to make a hefty profit.

Some cities across the world have been working on affordable housing plans for the last couple of years to combat the housing crisis, and hopefully these new ways of solving the housing crisis can be learnt from, and put into effect on a global scale. In Australia, the state government of Sydney launched a partnership with the private sector and community housing groups in 2018 to develop and renovate 23,000 social housing units in different neighborhoods.

In addition, Melbourne founded the Melbourne apartment project in 2018 to encourage home ownership, with 34 apartments built via this scheme. Six were sold at the market rate, which then enabled the other 28 to be subsidized through a deferred second mortgage model, in order to reduce the necessary deposit and repayments.

In India, they have found a cheaper construction material; glass fiber reinforced gypsum (GFRG) panels, which use a minimal amount of concrete and steel, and therefore the cost of the material is greatly reduced. This means that the houses made from this material in the future will be more affordable. In Austin, Texas, the company ICON has gone one step further to find more efficient and less costly ways to build houses, through developing 3D printing robotics that are capable of printing 2,000 square foot houses.

The global housing crisis is much bigger than just housing, due to the enduring issues of availability of transport and the nearby location of public services. The shortage of land must also be solved, due to limited land supply increasing demand and therefore also price. While it is important for a solution to be found to fix the current disparity between house prices and wages, it is also important to consider other solutions to unaffordable housing in cities. This includes repurposing vacant properties, and improving transport links to increase the amount of land around a city that people are happy to live in.

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Inflation is here and getting worse. The stats paint the picture and speak for themselves. The U.S. has hit the highest inflation levels in 40 years. The U.S. consumer price index increased 7%, which is the largest single-year rise since 1981. Wholesale prices spiked the fastest ever at 9.6% in November. The average wage growth was 4.7% in the U.S., notably less than the rate of inflation.

Higher wages help fuel inflation because companies need to raise prices for goods and services in order to cover the increased costs. It’s a cycle in which wages rise but costs rise even faster. If you’ve been to the grocery store or the gas pump, you can definitely feel the pinch. Oil has risen to the highest level in seven years. Should you be alarmed? It all depends on your situation.

What Is Inflation?

Inflation occurs when broad prices for goods and services rise, while purchasing power simultaneously falls over a given period of time. It is the rate of increase in prices for consumers measured over a period of a year. Thus, the consumer price index (CPI) is used to gauge inflation. The CPI measures inflation as experienced by consumers in their daily living expenses. The CPI is the rate of inflation.

CPI Data

The consumer price index (CPI) report is released monthly and measures the average change of prices paid by urban consumers for a market-based basket of products and services. The U.S. Bureau of Labor Statistics (BLS) collects the data through two surveys, including prices for commodities and services and prices for rent (housing). Every month, about 94,000 prices are crunched to compute commodities and services indexes. 

Rising PPI Can Drive Higher CPI

The producer prices index (PPI) is how much businesses pay. A higher PPI results in businesses passing on the price hikes to the consumers, which can push up the CPI. Wages need to rise to enable consumers to continue paying higher prices, which enables producers to pay higher prices as the circle continues, resulting in higher inflation.

But higher PPI doesn’t always result in inflation. If prices get too high, then consumers step back from spending, which builds up supply and causes prices to fall back down. Currently, wages are not rising as much as prices are rising. This will likely result in consumer spending cutbacks. This was reflected in the December 2021 retail sales report which indicated a 1.9% decrease from November 2021, however, still up 16.9% from December 2020. 

This decrease could be a sign that consumers are feeling the pinch and pulling back on their spending to some degree. Keep in mind, the retail spending report is mostly composed of consumer discretionary (nonessential) products, which tend to rise during economic growth periods as disposable income rises. These include items like apparel, restaurants, leisure, cars and parts, and general merchandise. Whereas consumer staples are essential products used on a daily basis like food, toothpaste and other personal products. However, the pace of rising wages still falls short of CPI growth, thus rising prices and diminishing buying power continue to drive inflation higher.

What Causes Inflation?

There are generally three types of inflation defined by the underlying cause. Rising demand and falling supply cause prices to rise (demand-pull inflation). However, rising production costs can also result in higher prices (cost-push inflation). Rising labor costs and wages can also cause prices to rise (built-in inflation). Inflation can take years to spawn, and while it has exploded to the upside upon the reopening phase post-pandemic, the seeds may have been planted years ago with the Federal Reserve monetary policy resulting in cheap money aplenty. 

Compounding Problems With Covid-19

The pandemic accelerated inflation but also distorted it. The mandated pandemic-related lockdowns were temporary, which fueled pent-up demand that would outstrip supply upon the economic reopening. Like stretching a rubber band to its extreme, holding and then letting go, as it snaps back furiously. The government-imposed lockdowns caused supply shortages to develop, as businesses and factories substantially reduced output to prevent oversupply. Chip fab factories had already scaled down production before the pandemic hit, not anticipating the demand that quickly increased.

The slowdown caused a supply glut, which then turned into a massive supply shortage when the reopenings and economic restarts occurred. Global supply chains felt immense pressure and disruption as economies attempted to get back on track. A shortage of supply and labor coupled with rising raw materials and logistics costs triggered prices to surge. The federal stimulus and unemployment programs made it difficult to get workforces back online, as many were better off collecting benefits rather than returning to work. This caused employers to have to pay more to find talent, creating rising wage pressures in a tightening labor market.

Omicron Pressures

The latest surge of the omicron variant of Covid-19 has caused further disruptions in the supply chain and logistics as workers take absence and quarantine. U.S. airlines have canceled thousands of flights due to worker shortages from Covid-19. Omicron is the fastest spreading variant, and while vaccination and boosters can lessen the severity to avoid hospitalizations, it doesn’t completely prevent the spread of it. The good news is that the side effects are not as severe as earlier strains, and the rate of hospitalizations has significantly decreased for those who are vaccinated.

The January 2022 Federal Open Market Committee (FOMC) meeting repeated the December meeting notes in that inflation has gone too far above its 2% target. It looks like it’s time to end quantitative easing in March and raise interest rates amid a strong labor market. The way I see it, consumers should be relieved that inflation should fall back. Investors should be concerned that financial assets like stocks, collectibles and real estate will also deflate in value.

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