The Recession That’s Around the Corner

In this photo illustration miniature houses from a Monopoly board game can be seen next to American dollar notes. (Christopher Furlong/Getty Images)

Commentary 

Over the past two or so years, our economy has been far from “normal.” The pandemic wreaked havoc on a bustling economy seemingly overnight and quickly ignited a recession in all the G–20 countries. Despite that, in 2020, the demand for housing was insatiable, which caused huge jumps in home prices, a stark contrast to the drop in house prices that usually occurs in a recession.

The housing market isn’t the only thing that made the recession of 2020 a statistical outlier. Unlike other recessions, which are usually the result of a longer-term boom and bust cycle, this recession was the immediate result of COVID-related lockdowns. Across virtually every sector, businesses were forced to close down immediately, and employees were either furloughed or laid off. Thankfully, with the availability of vaccines, a major recovery kicked in in 2021.

And what a recovery. In 2021, the GDP grew the fastest it had since 1984, successfully reabsorbing all pandemic losses while adding 6.2 million jobs to the economy. Thanks to these factors, Americans as a whole found themselves with more disposable income than they had in 2019 or 2020.

Currently, this recovery is being threatened by a powerful force: record-high inflation. The year-over-year inflation rate in March 2022 was a whopping 8.5 percent, the highest it has been since 1981. A lot of this inflation is the result of infusing so much capital into the economy through economic stimulus efforts during the worst of the pandemic. Now, labor shortages, supply chain issues, and other global events are causing prices to spike.

Most notably, the war in Ukraine has led to sanctions against Russia, which in turn has led to higher gas prices at the pump. China also has instigated a wave of extreme lockdowns in some of its major manufacturing hubs, which will also contribute to the rising costs of consumer goods.

Inverted Yield Curve

There’s another indicator besides inflation that a recession is looming, and that’s the inverted yield curve. A yield curve is important to economic forecasters because it plots the yield of all U.S. Treasury securities. Typically, a yield curve slopes upward, which is a sign that long-term interest rates are higher than short-term interest rates. This is the case because holding debt for a longer term is inherently riskier than holding short-term debt.

An inverted yield curve is atypical and results from investors’ expectations that longer-term interest rates will decline, which is usually a precursor to a recession. An inverted yield curve has preceded every recession since 1955 and happens when investors expect long-term interest rates will decline, which happens in a recession.

When you see an increase in short-term rates, which is what an inverted yield curve reflects, banks will increase the rates for any borrowing, including mortgages, small business loans, car loans, and credit cards. When borrowing becomes too expensive, economic growth is suppressed, which pushes the economy closer to a recession.

U.S. dollar notes in front of a stock graph in a picture illustration on Nov. 7, 2016. (Dado Ruvic/Illustration/Reuters)

Protecting Your Money

While the possibility of a recession is looming, it doesn’t have to spell economic doom. As a real estate developer, I have weathered several recessions, and I’ve learned through experience how to minimize losses. These are the steps that have helped me weather economic downturns.

-  Minimize your cash reserves.

An emergency fund is useful, but storing large sums of cash in a savings account will erode the buying power of your money. As I stated previously, the current rate of inflation is 8.5 percent. That means that if I were to deposit $100,000 into a savings account and the inflation rate didn’t change, one year later the buying power of that same sum would be closer to $92,000.

-  Invest in assets that can hedge against inflation.

During periods of high inflation, it’s better to invest in types of assets that will hold their value. Gold is an excellent investment, and has historically acted as a backup currency in volatile economies. Commodities are also prudent investments during periods of high inflation. Commodities include a wide range of products, including oil, natural gas, different types of crops, and precious metals. Of course, individual commodities can fluctuate, which is why it’s a good idea to invest in funds that are a composite of multiple types of commodities.

- Refinance any adjustable-rate debt.

Whether the economy is in a boom or bust phase, I always advise that people steer clear of any adjustable-rate debt. If you have an adjustable-rate mortgage, I urge you to switch to fixed-rate. An adjustable-rate mortgage can offer a lower interest rate at the outset, but eventually your interest rate will become a wild card. Credit cards are another type of adjustable-rate debt, so do whatever you can to pay down your credit cards. In my opinion, this is a good idea regardless of whether we’re in a recession or a time of growth.

Conclusion

The signs of an impending recession are here. Historically, high inflation combined with low unemployment has acted as a warning that there will be a recession in one to two years. Jumps in gas prices have also been a precursor to six of the past seven recessions. While it’s impossible to pinpoint exactly when a recession will occur, it’s always a good idea to prepare for when one strikes.