Last Updated: February 16, 2023
In the last 3 years, investors have been inundated with economic terms. You’ve heard about transitory inflation, inverted yield curves, hard landing, and soft landing, amongst others.
Now there’s a new economic meme making the rounds. It’s called a rolling recession.
What is it and what does it mean for your money? Let's find out.
A recession is when the economy as a whole slows down.
A rolling recession on the other hand is when several sectors or industries in the economy are affected by a recession more than others.
One industry/sector goes down, then another, but the economy as a whole never goes down, and the job market stays stable for the most part. In other words, industries and sectors don't all go down at the same time. Instead, they go down one at a time.
By textbook economic standards, the U.S. economy is in solid shape. Although the first half of 2022 started with negative growth, a strong labor market, and resilient consumer spending helped turn things around and give hope for the year ahead.
Gross domestic product, which tracks the overall health of the economy, rose more than expected in the fourth quarter, and the Federal Reserve is widely expected to announce a more modest rate hike at its policy meeting as inflation starts to ease.
However, several sectors of the economy are showing signs of a rolling recession. For example, some economists believe the housing market and manufacturing are both in rolling recession territory.
Also, the tech sector is beginning to show signs of weakness. There has been a wave of layoffs in the sector, with other companies putting a hiring freeze for a year or two.
Given that some sectors are struggling, while others seem to be faring better, the US economy is definitely in a rolling recession.
But regardless of the country’s economic standing, many Americans are struggling in the face of sky-high prices for everyday items, such as eggs, and most have exhausted their savings and are now leaning on credit cards to make ends meet.
From the start of the pandemic to the end of 2021, U.S. households built up $2.7 trillion in extra savings, according to Moody’s Analytics, collectively saving 16.8% of their disposable income. This was well above the 8.8% saved in 2019. In 2022, the savings rate fell to 3.3%.
Several reports show financial well-being is deteriorating overall. Americans are raking up debt as they try to cope with rising consumer prices with many households struggling financially after draining their savings last year.
While the impact of inflation is being felt across the board, every household will experience a rolling recession to a different degree, depending on their industry, income, savings, and job security.
Still, there are a few ways to prepare that are universal. Here are some tips you can use to manage your expenses in a rolling recession.
Cash is much harder to come by during a recession.
More so, when companies are laying off workers massively, cutting back on your expenses is the logical step you can take in such an economic situation. That may mean cutting off things that you can do without, such as the subscription services that you signed up for during the Covid pandemic.
If you don’t use it, lose it.
Avoid debts (credit cards, mortgages, auto loans, etc.) that come with variable-interest rates.
This is because the amount you would pay as interest is directly tied to how much the Federal Reserve hikes or lowers interest rates. Anyone having a debt with a variable-interest rate would be paying more given the current interest rate, which is at a record high.
The rates on online savings accounts, money market accounts, and certificates of deposit (CDs) have all gone up, but they still can't keep up with inflation.
Series I bonds are assets backed by the federal government that protect against inflation. They have almost no risk and are paying 6.89% annual interest on new purchases through April. This is less than the 9.62% annual rate that was available from May to October of last year.
Even though you can only buy a certain amount and can't touch the money for at least a year, you'll get a much better return than with a savings account or a one-year CD.
If you are going to hold stocks during a recessionary period, the best ones to own are from established, large-cap companies with strong balance sheets and cash flows.
Not only are these companies better situated to weather economic downturns than smaller companies with poor cash flows, but they are also more likely to pay dividends.
For investors, dividends serve a few purposes.
First, if a company has a long history of paying and increasing dividends, you can have peace of mind that it is financially sound and can survive most economic environments.
Second, dividends provide a return cushion. Even as share prices decline, you still receive a return on your investment. It is for these reasons that dividend stocks tend to outperform non-dividend stocks during market downturns.
Building an emergency fund can help prevent you from needing to borrow money or make difficult financial decisions in those moments, by giving you savings to fall back on.
Even having just a little more cash set aside can help ensure an unforeseen event like a car repair or unexpected bill does not sink your budget.
You can set a target and work towards it by inputting your essential spending for the month, and working out how much you need to save and how long it would take you to reach this goal.
The US economy is in topsy-turvy mode. No one actually knows the direction it is headed. Sectors are reacting differently to the economic cycle. While some are showing resilience, others are faltering and showing weakness.
As such, playing safe with your investments is the right move to make in such circumstances. As an investor, your focus should be on sustaining income and protecting the value of your portfolio.
March 23, 2023