The U.S. economic system grew within the third quarter, reversing a destructive pattern from the primary half of the yr — however weak spot looms beneath the floor and households should not be lulled right into a false sense of monetary safety, economists and monetary advisors stated.
“I think investors should still continue to be cautious … and plan for more disruption,” stated Winnie Solar, co-founder and managing director of Solar Group Wealth Companions, based mostly in Irvine, California, and a member of CNBC’s Advisor Council.
Gross home product — a sum of all the products and companies produced within the U.S. — grew by 0.6% from July via September, the Bureau of Financial Evaluation estimated Thursday. That determine quantities to 2.6% progress on an annualized foundation.
“For the U.S. economy, a developed economy, that’s very respectable, slightly above average,” stated John Leer, chief economist at Morning Seek the advice of, a knowledge analysis firm.
Why it could be ‘a cold winter’
That GDP enlargement marks a rebound from a deceleration in each Q1 and Q2. Two consecutive quarters of destructive progress meets the widespread definition of a recession — although the Nationwide Bureau of Financial Analysis, typically thought-about the arbiter of downturns, hasn’t officially declared one.
Nonetheless, many economists don’t expect the recent growth to persist.
The headline growth in Q3 was driven by non-domestic factors, like an increase in exports overseas, Leer said. But the U.S. can’t depend on strong global demand to continue, due partly to a strong dollar, which makes U.S. products more costly to buy, as well as economic challenges in Europe, an ongoing slowdown in China, and high food and energy prices globally, Leer added.
He also pointed to a slowdown in residential and non-residential fixed investment, which includes things like homebuilding and construction of commercial buildings and warehouses.
And consumer spending, which accounts for two-thirds of the U.S. economy, “slowed to its weakest pace since the first quarter when spending first hit a wall in response to soaring inflation,” Diane Swonk, chief economist at KPMG, wrote in a tweet.
“Bottom Line: This may be the strongest and only positive print on GDP growth we see for a while,” Swonk wrote. “Bundle up for what looks to be a chilly winter.”
And there are issues past some underlying weak spot within the federal knowledge, economists stated.
Shopper costs this yr have risen at in regards to the quickest tempo in 4 a long time, pressuring family finances. The Federal Reserve has additionally been elevating borrowing prices aggressively to cut back inflation. Greater rates of interest have already pushed mortgage demand to the bottom stage since 1997.
“Export growth will soon fade and domestic demand is getting crushed under the weight of higher interest rates,” Paul Ashworth, chief U.S. economist at Capital Economics, stated in a analysis word. “We expect the economy to enter a mild recession in the first half of next year.”
What shoppers can do to prepare for a recession
What this boils down to: Do not be lulled right into a false sense of safety, monetary advisors cautioned.
Whereas a downturn is not inevitable, households can take monetary steps to prepare in case one comes and triggers layoffs and extra market volatility alongside the way in which.
“Think of a reasonable worst-case scenario — how would you fund it?” stated Allan Roth, an authorized monetary planner and authorized public accountant based mostly in Colorado Springs, Colorado.
1. Shore up your money reserves
Households ought to all the time guarantee they’ve entry to money in case issues go fallacious, whether or not job loss, house repairs or sudden medical payments, for instance. However with recession would possibly come higher probability of needing to draw from that monetary buffer.
The overall rule of thumb is to have three to six months’ worth of expenses handy. Sun advises clients to have six months, plus an extra three months for each child in a household.
Consumers should consider adjusting their emergency-fund needs based on overall stability, Roth said. For example, someone working at a start-up company generally has a less dependable job income stream than a tenured university professor and may therefore need more cash access, he said.
“Cash” also has a broader definition than parking money in a traditional bank account with paltry returns, advisors said. Consumers can look to high-yield online savings accounts or money market funds, for example, advisors said, which currently pay a higher return.
2. Reduce your debt burden
Paying down credit-card debt and other high-interest loans — and making sure households aren’t racking up more — is also of primary importance, experts said.
Something that lends further urgency to this advice: Variable rates are likely to increase more due to the Federal Reserve’s anticipated interest-rate hikes.
“There’s a potential for some folks to lose their jobs, and you’d hate to see in two or three months people don’t have any savings, have gone into debt, and it triggers a wave of personal bankruptcies or other forms of financial hardship,” Leer said.
Clients are showing more financial anxiety these days than they have in many years — but paradoxically, many households spend more to feel better, and that may be happening on credit cards, said Sun. Credit-card balances jumped 13% in Q2 — the largest year-over-year increase in more than 20 years, according to a recent report from the Federal Reserve Bank of New York.
Sun advises focusing on paying down debt with interest near or above the inflation rate, which is currently about 8% on an annual basis. The only potential deviation would be to first save money in a 401(k) plan up to the company match, if that’s available, she added.
Households might also try to reduce their debt burden by downsizing to one car instead of two to cut monthly auto payments, for example, Sun said.
Borrowers with a fixed-rate home or other loan at 3.5% are in a good position and don’t necessarily need to accelerate their debt payments, Leer said.
3. Stay the course on investments
Investors should also stick to their investment strategy — and not panic in the face of big stock and bond losses, Roth said.
Pulling money out and ditching a well-laid investment plan locks in losses, which right now exist only on paper. The S&P 500 stock index is down 20% in 2022; meanwhile, U.S. bonds, usually a ballast when shares tank, are down about 16% previously yr.
“We’re like heat seeking missiles,” Roth stated. “We buy high and sell low.”
