What is an Economic Downturn and How Does it Affect Americans?
An economic downturn is defined as a significant decline in the economy of a country or region. It refers to a situation in which the economy does not experience growth for a sustained period of time.
A recession is an economic downturn that leads to falling Gross Domestic Product (GDP) and rising unemployment rates.
Breaking Down US Economic Policy
The U.S. government uses two types of policies—monetary policy and fiscal policy—to influence economic performance. Both have the same purpose: to help the economy achieve growth, full employment, and price stability.
Even though economic policy is mind-numbingly boring, it is important to have at least a basic understanding of how it works, so that we can have an idea of what is coming–because then we can know how to plan.
Monetary policy is used to control the money supply and interest rates.
It is exercised through, the Fed, which has the power to control the money supply and interest rates.
- When inflation is the issue, the Fed will use contractionary policy to:
- decrease the money supply
- and raise interest rates.
- When recession is the issue, the Fed will use expansionary policy to:
- increase the money supply
- and reduce interest rates.
Fiscal policy concerns the government’s power to spend and tax.
- When the country is in a recession, the government will:
- increase spending,
- reduce taxes,
- or do both to expand the economy.
- When we’re experiencing inflation, the government will:
- decrease spending
- or increase taxes,
- or both.
That is how it is supposed to work, anyway. That’s what the study of economics lays out. Problems arise, however, when the controlling party goes against economic policy, seemingly with an agenda.
The Current Outlook
For years, recession has been defined as 2 consecutive quarters of negative GDP, which would have put us in a defined recession in the summer of 2022. Miraculously, (*insert eye roll) when that did happen, with Joe Biden in the President’s chair, the definition was suddenly changed, leaving us, technically, not in a recession.
Regardless of what they call it or how many times they change the name, Americans are seeing and feeling the crunch in their daily lives.
In an article by Kristen Altus of Fox Business, some of this crunch is explained… and a warning is given.
Global economist, Nancy Lazar, on Mornings with Maria, predicted feeling the full impact of a recession in the second half of 2023 as lag effects from the Federal Reserve’s rate hikes take hold.
Lazar argued it takes about one year for changes in Fed funds to have a negative impact on the economy.
“We think there will be a further stalling out in the second quarter and then an outright decline in the back half of the year,” the economist explained.
“Because you had, first, a global tightening cycle in 2021, the lagged effects of that hit the U.S. economy with our multinational economy. Second, oil prices surged in 2021, and third, bond yields rose significantly. So what slowed last year was those three metrics. Going into this year, the lagged effects of that Fed tightening cycle is reflected in money supply now declining.”
The market expert additionally noted Americans will see a “slow dance into a recession,” with the lag effects showing up first in earnings.
“It’s a very bumpy rollercoaster, but the rollercoaster is headed down,” Lazar said. “But here in January, we think things could get a little better. We really don’t see a recession until the back half of 2023. We think the first half is actually going to be muddling along.”
What Inflation Looks Like to Families
The October consumer price index, which measures changes in the cost of food, housing, gasoline, utilities, and other goods, rose by 7.7% over the past 12 months — nearly a 40-year-high. Inflation has left families falling short and having to scramble to make changes in their day-to-day and month-to-month living.
The latest data from the Bureau of Labor Statistics (BLS) shows energy prices are up 17.6% and gasoline alone is up nearly 17.5% over the last year. Used vehicle prices are up nearly 4.1% for the year, and new vehicle prices have increased 8.4%. Food prices have also increased by 10.9% year over year.
Something to remember here is that year-over-year stats are somewhat misleading. Inflation the previous year was already up incredibly.
After polling followers across social media about how inflation is causing changes in their lives, the following are a few of the responses I received.
- People are changing what they feed their families because they can no longer afford their typical grocery haul.
- Going out to eat, or heaven forbid dinner and a movie, has slowed way down.
- People are changing their buying decisions for vehicles, opting for repairing an old vehicle to keep it running longer instead of purchasing another.
- More people are looking to thrifting for many of the necessities that they would normally purchase at a local retail store.
There are so many additional ways that American families are feeling the pinch of inflation. You can read more about Inflation and its impact on the American Family in The Agonizing Cost of Inflation.
All of these are points to keep in mind. Signs in the economy are pointing to remaining in this economic downturn and even sliding into a full recession. We have to prepare.
What Can You Do To Prepare for an Economic Downturn?
If you begin well-before an economic downturn, you will certainly have more time to make sure that some steps are already in place to help you make it through to the other side. Of course, when it’s happening right in front of your eyes and you are not yet ready, you may have to scramble to get on top of it.
The following are a few important steps that everyone should be looking into currently, as we are definitely in an economic downturn –at best.
*Have an emergency fund.
It is always a good idea to have an emergency fund of a few months of salary tucked away for whatever emergency might arise. It is also a good idea to make this separate from your regular savings account.
*Pay off high-interest debt.
Credit cards can certainly be helpful in some cases, but they are a killer when it comes to the interest that is stretched out over time. If you have the ability to start paying them off quickly, you will be in a much better position.
*Live below your means.
Reorder your budget (or start one if you haven’t already). A budget shows you where each dime is allotted and it will help you to hold yourself and your family accountable.
*Bolster your income with a side hustle.
There are so many different options out there to make a little extra money on the side. Look at your strengths, talents, and resources and create a plan that you could work.
*Search for ways, even little by little, to become more self-sufficient.
It can be something like growing some or all of your own food, downsizing your home or automobiles, or even as far as changing your profession. People across the country right now are making steps, large and small, to adjust their level of reliance on society and the whims of the government.
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You may enjoy some of our other informative articles, like How to Cut Expenses When Things Get Tough and Budget Creation and Financial Planning, and The Agonizing Cost of Inflation.
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