How can recessions affect young professionals?
At the end of the first quarter in 2022 we waited for the GDP report to be released by the Bureau of Economic Analysis. GDP stands for Gross Domestic Product. It is the total value of all goods and services produced in a country each year. GDP per capita is a measure of a country’s average economic output per person. GDP is an important indicator of a country’s overall economic health. A country with a high GDP growth rate is considered to be doing well economically.
The GDP report is released four times a year, and each release has three readings. The advance reading is released first, followed by the preliminary reading and then the final reading. At the end of the first quarter the final reading for the first quarter was -1.6%. When the final reading came out, many circled July on their calendars to see when the results for the second quarter would be released. Well, the results are in, and the advanced reading reported -0.9%. If this number holds up in the final reading “by definition” we are in a recession.
Above is a picture of some of the GDP Final readings from the third quarter of 2018 through the advance reading of the second quarter of 2022. In this chart we can see the big dips in GDP in the first and second quarter of 2020. During that time, we called it by its name…a recession. Now the unprecedented spike you see in the third quarter of 2020 was around the time the stimulus began to prop up the economy. We have been cruising with some good GDP numbers since that time, but then the boogie man showed up in late 2022. Its name was called High Inflation. There’s always inflation in our economy, but high inflation is a problem. I will talk about inflation in another article I don’t want to lose sight of the focus of this article.
So, what is a recession? What are some characteristics?
A recession is a decline in economic activity lasting more than a few months. It is considered to happen when Gross Domestic Product (GDP) falls for two consecutive quarters. A recession can also be described as a period of decreased activity in the business cycle.
Recessions are often characterized by high unemployment, falling stock prices, and decreased consumer spending. These factors can lead to a decrease in demand for goods and services, which can then lead to layoffs and further reductions in spending.
While recessions are often seen as negative events, they can also have some positive effects. For example, recessions can lead to lower prices for goods and services, which can be beneficial for consumers. They can also lead to increased innovation as businesses look for ways to cut costs and become more efficient.
Recessions are a natural part of the business cycle and occur in all economies. They cannot be prevented, but their effects can be mitigated through policy measures such as stimulus spending or tax cuts. To dive a little deeper here are eight ways a recession can affect young professionals.
1. Job security
During a recession, some industries are hit hard. One of the biggest concerns for us young professionals is job security. With businesses cutting costs and laying off employees, it can be difficult to feel secure in your position. If you do lose your job, it may be harder to find another one due to the increased competition. During these uncertain times we must create a plan and act. Throughout history these jobs are hit hard during recessions: Construction workers, Manufacturing workers, Retail employees, Administrative and office support staff, and Food service workers. Currently many large tech companies are balancing their sheets by cutting down on staff. This is a sign that a storm is beginning to brew in the labor force.
2. Salary
With businesses cutting costs, many are reluctant to give raises or even offer competitive salaries to new employees. This can make it difficult to earn a good living, especially if you are just starting out in your career. The inflation is our country is at a 40 year high, not to mention there are tensions growing in Asia and a war in Europe. This can have impacts on how much we pay at the pump. Some jobs are allowing hybrid/ remote work to continue, but some companies are looking to bring staff back into the offices to work. During these times we should strive to create a budget, cut back on spending and work on eliminating high interest debt since the Fed is looking to continue raising interest rates.
3. Student loans
Many young professionals have significant student loan debt that they are struggling to repay. During a recession, it can be difficult to find a job that pays well enough to make these payments. This can lead to default and further financial difficulties. Thankfully, we currently have a pause on student loan payments. The White House is currently discussing how to resolve the student loan debt crisis. If the President decides to eliminate payments all together, I do believe that we will feel the effects of it. $1.8 trillion can bring relief but there are better ways we can address the issue. However, if you find yourself in a financial bind and know that you will not be able to afford the student loans payments after the pause ends, please speak with your student loan provider so that you can learn about your options.
4. Housing
The housing market is often one of the first places to feel the effects of a recession. With fewer people buying homes, prices can drop, and the market can become unstable. This can make it difficult for young professionals to buy a home or even find affordable rental housing. Currently we have not seen too much turbulence in the housing market. Some markets across the U.S. are still booming. One of those cities is Atlanta Georgia where the average price for a home was $270,000 and now it’s north of $490,000. Reach out to a real estate agent who has the experience with these kinds of markets if you are interested in purchasing a home.
5. Consumer spending
During a recession, people are more cautious with their money. This can lead to less consumer spending, which can impact businesses that rely on this income. This is especially difficult for young professionals who are just starting out and may be working in industries that are particularly affected by recessionary spending habits. These times have been slightly different than other times in history. We currently have a pandemic going on and are dealing with growing concerns about monkey pox.
According to Valens Research Analyst Team “Consumer balance sheets aren’t only strong; they are ready to fuel more growth. For those keeping an eye out for potential recessionary concerns, this should also come as a big sign of confidence in the economy. Consumer spending constitutes nearly 70% of total gross domestic product (“GDP”) production and is crucial for the health of the economy. That’s why concerns about customers tightening their wallets on discretionary purchases is often the first sign of troubled times.
In this case, continued spending growth in the US should only fuel further growth in the economy. And in the process, it should calm concerns about how much money the typical consumer can afford to spend. There is still significant capacity for consumers to fuel growth because consumer balance sheets remain healthy. Not only are credit card balances still below pre-pandemic highs and bank accounts are more flush, but we also see consumers continuing to make good decisions with their credit accounts.”
Source: https://www.linkedin.com/pulse/consumer-balance-sheets-arent-only-strong-ready-fuel-more-doug-haddad
Only time will tell with the research that was done. Now granted, it’s good to know that many were being responsible with their credit and saving money. An interesting question is how long will most of those consumers continue to save even after the recession is over?
6. Investments
Another area that can be difficult for us young professionals during a recession is investing. With the stock market often taking a hit during an economic downturn, it can be difficult to grow your investment portfolio. However, if you are investing for the long term, this can provide you with a lot of opportunities as prices for quality companies begin to drop. If you are new to investing and are unsure of what to do or have questions, please reach out to your broker if they can help and if they do not, please reach out to a financial advisor for assistance.
7. Retirement
Along with investments, retirement planning can also be difficult during a recession. With the stock market down, you may have less money saved for retirement than you had planned. This can mean working longer or making lifestyle changes to make ends meet during retirement. Therefore, it’s important for us to plan and act. During a recession, many people who planned to retire now must wait to retire. Some portfolios end up dropping huge percentage depending on the type of investment they chose. If you have a retirement account, it’s important to understand your risk and what can happen to your portfolio during a recession.
8. Mental health
Finally, it’s important to consider the impact a recession can have on our mental health. The stress of job insecurity, financial difficulties, and other recession-related challenges can take a toll on your emotional well-being. Unfortunately, during recessions, suicide rates increase as well as crime. According to an article on WebMD “The suicide rate in the United States rises when the economy slumps and falls when economic times improve. And this has been the case at least since the Great Depression, which started with the stock market crash of 1929, the CDC says in a new study”.
“Knowing suicides increased during economic recessions and fell during expansions underscores the need for additional suicide prevention measures when the economy weakens,” James Mercy, PhD, of the CDC’s Injury Center’s Division of Violence Prevention, says in a news release. “It is an important finding for policymakers and those working to prevent suicide.” If you’re struggling, don’t be afraid to seek out professional help.
What are some things we can do now to prepare for a recession?
1. Keep your emergency fund intact
One of the best things we can do to weather a recession is to make sure our emergency fund is in good shape. An emergency fund is a savings account that you use for unexpected expenses, like a job loss or a major repair. Having a strong emergency fund will help you avoid going into debt if you experience a financial setback during a recession. Aim to have at least three to six months of living expenses in your emergency fund.
2. Stay disciplined with your spending
Another important thing to do during a recession is to stay disciplined with your spending. Just because the economy is struggling doesn’t mean you should abandon your budget. If you’re able to stick to a budget, you’ll be in a better position to weather a recession. When you know where your money is going, you can adjust if necessary. Also, if you have extra cash, you can use it to beef up your emergency fund or pay down debt. Remember paying down high interest debt is one of the most important steps towards achieving financial independence.
3. Invest in recession-proof stocks
Investing in stocks can be a risky proposition, but if you choose recession-proof stocks, you can minimize your risk. Recession-proof stocks are those that tend to do well during economic downturns. Some examples of recession-proof stocks include utility companies, healthcare companies, and consumer staples companies. These types of companies are essential to the functioning of the economy, so they tend to weather recessions better than other stocks. Remember to do your own research and if you’re still unsure. Reach out to a financial advisor for guidance.
4. Pay down your high interest debt
If you have high-interest debt, like credit card debt, now is a good time to find ways to pay the balances down. Refinancing isn’t too good of an idea right now, but everyone’s situation is different. So, a personal loan could provide you with more relief rather than you not making a move at all and continue carrying a balance. If you have high credit card balances, please reach out for help from a financial advisor who can help you make the best decision for you and your family.
5. Review your insurance coverage and look for areas to save
During a recession, it’s important to review your insurance coverage. Make sure you have the right amount of coverage for your needs. You may need to adjust your coverage if your circumstances have changed. Sometimes we can save a lot of money by changing our insurance provider. You will find that another company offers the same coverage for $100 less than your current insurance provider. Many might not think $100 is a lot of money but saving money in any way we can during a recession is very important.
Conclusion:
A recession although is healthy for our economy can influence us as young professionals. Especially for young professionals who are just starting their careers. Most professionals feel the impact of a recession in different ways, depending on their job and career path. Some may find it harder to get a job, while others may have to take a pay cut or switch careers altogether. It’s important to be prepared for a recession by having savings set aside and networking with other professionals. Networking is one of the best ways to find opportunities that are available during these times. Please feel free to share this article with your family and friends so that we all can prepare for the storm that is coming our way. Check out my other blog What is the Federal Reserve? How does their decisions impact our lives?