Talk of recession in 2022 got louder as the year progressed and the Fed kept raising interest rates, raising fears of a “hard” landing. The fear is that the Fed raises interest rates too fast, which has a cooling effect on the overall economy since it makes the cost of borrowing more expensive. In response to higher interest rates, potential borrowers hold out on purchases typically made on credit, which reduces demand for those products, starting off a negative feedback loop which typically ends with high unemployment and a recession. In 2023, companies have continued to announce layoffs, stoking fears that the recession warning signs are flashing. So let’s break this down a bit step by step so you know what to expect in the event of a recession.
What is a recession?
Good question. The technical definition of a recession is 2 consecutive quarters of slowing economic activity as measured by the GDP or Gross Domestic Product.
Are we in a recession now?
No. Since Q3 and 4 of 2022 both showed growth over the prior quarter, we are still in the “boom” portion of an economic cycle.
Are we headed for a recession?
I don’t have a crystal ball, so I can’t answer that one definitively. The general fear when the Fed begins raising interest rates is that they will go too far to slow an inflationary economy and tip the economy into a recession. There are generally 3 schools of thought on this:
- The Fed will go too far and we will have a “hard landing” and there will be a recession by the end of 2022
- The Fed will get it just right and we will have a “soft landing” by slowing the economy down enough to combat inflation without tipping it into a recession. This is also known as the “Goldilocks scenario.”
- A new school of thought is emerging that there may not be a landing at all and that we’re headed for more growth in 2023
What should I do to prepare for a recession?