4 reasons why the economy seems to be collapsing – and what to do about it

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

The truth is that we’re probably not in a recession right now (although it’s possible), but there are plenty of signs that a recession is imminent.

Sign 1. The Fed raises rates

Inflation is rampant, and the Federal Reserve’s tool to fight soaring prices is its ability to set higher interest rates. It makes borrowing more expensive and slows the economy – by design.

The problem is that the Fed was very late in raising rates. Inflation has been 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 last year.

Last week, the Fed raised rates by half a percentage point, the largest single 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 the inflation is under control – then the Fed would continue to raise rates by a quarter point for some time.

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

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

Extreme fear is the predominant sentiment on Wall Street this year. CNN Business’s Fear and Greed Index is a measly six out of 100.
Over $7 trillion has been wiped out of the stock market this year
After hitting record highs in early January, the stock market has lost almost a fifth of its value – plunging stocks close to bear market territory. the Nasdaq (COMP) is already in a bear market. Over $7 trillion has evaporated from the stock market this year.

Fearing that rising interest rates will erode corporate earnings, investors are heading for the exit.

This is bad news for people’s pension plans. It’s also bad news for a number of investors who rely on the market for income, including day traders who expected the stock market to move almost in a straight line 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 CNN’s ticker or on their phone screens, it has historically given people pause. Consumer confidence fell to its lowest level in 11 years in May.

This is potentially bad news for the economy, as consumer spending accounts for more than two-thirds of US gross domestic product.

Sign 3. The bond market

When investors aren’t so hot on stocks, they often turn to bonds. Not this time.

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

This usually happens when the Fed raises rates – the higher cost of borrowing makes the bonds less valuable when they mature, so a higher interest payment on the bonds (the yield) will help compensate and make them more attractive to investors.

Bonds also sold off as the Fed decided to unwind its huge portfolio of Treasuries it had been buying since the pandemic to support the economy.

As bonds sold off and investors grew fearful of an economic slowdown, the spread between short- and long-term bond yields narrowed. Yields on the two-year Treasury note briefly exceeded those on the benchmark 10-year note in March for the first time since September 2019. This so-called inversion of the yield curve has preceded every recession since 1955, producing a ” false positive” just once, according to the Federal Reserve Bank of San Francisco.

Sign 4. Chaos around the globe

None of this happens in a vacuum. Russia is continuing its deadly invasion of Ukraine, which has stifled supply chains and sent energy prices soaring. China continues to lock down some of its biggest cities as Covid cases remain high. And a labor shortage has pushed up wages and hampered the normal flow of goods around the world.
Russia continues to threaten European countries by cutting off energy supplies, which could push 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 spill over into the United States, hurting the US economy at the worst possible time.

What to do

OK, so a recession could be coming soon. Here is what do not to do: panic.
Even if a recession is inevitable, it is unclear 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 downturn.

Lock in a new job now: With an extremely low unemployment rate and many openings, it is a market for job seekers. This could change quickly in the event of a recession.

Take advantage of the real estate boom: If you’ve been hesitating about selling your home, it might be time to make the list. US home prices are up nearly 20% year over year, but mortgage rates are also rising, which will eventually dampen demand.

Put money aside: It’s always a good idea to have cash — cash, money market funds, etc. — to cover urgent needs or unforeseen emergencies.

Finally, a sound 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 generally wrong. The best way to achieve your long-term goals is to simply stay invested and stick to your allocation.”

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

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