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 1. Individuals
 2. Build Your Knowledge
 3. September economic outlook: Let’s talk recession.




SEPTEMBER ECONOMIC OUTLOOK: LET’S TALK RECESSION.


QUICK TAKEAWAYS

 * Recession science is not really science. Experts are constantly adding to the
   data they evaluate to make an official determination. So don’t let a current
   headline or pronouncement from an expert push you to risk your financial
   goals.
 * What you think and feel about a recession depends, in part, on your history
   with economic downturns. Any shift in an economic cycle looks different based
   on factors occurring at that moment in time.

People try to predict all sorts of things: the existence of aliens, the length
of celebrity marriages, and even the outcome in curling matches. And of course,
they bet on the likelihood of a recession.

In July, if you had predicted with certainty that an economic downturn was
ahead, the odds would have been in your favor; all signs (and an increasing
chorus of pundits) pointed in just that direction. Just a month later, however,
those odds suddenly plummeted.1 That quick change is instructive for how to
approach the economy over the next few months. It also offers strategies you can
take to potentially insulate your finances—and boost your odds of safely
weathering the economic wobbliness that’s sure to keep happening.


WHAT IS A RECESSION, EXACTLY?

If you’re looking for an academic definition of a recession, it’s not hard to
find: The National Bureau of Economic Research (NBER) defines a recession as two
consecutive quarters in a row of declining economic activity, or gross domestic
product (GDP).2

Pretty straightforward, right? But how does that explain the outliers, such as
the decline from March 2020 through May 2020—just two months, not two quarters?3
And how does it account for the NBER initially pinpointing the start date of the
2001 recession as September before eventually revising it to March?4

Well, that’s because two quarters of decline is a benchmark, not an absolute.
The NBER does a fair amount of revising as data sets become more robust. (Even
that GDP number often gets an update.) Experts layer in other numbers, too, such
as employment measured by a household survey and real personal consumption
expenditures, to name just two.5

“Historically there are often signs that tell you we are headed toward a
recession,” says Heather Winston, director of individual solutions at
Principal®. “But think of it like this: When a bull or bear market ends, you
don’t really know it ended until well after the fact. It’s similar with
recessions. You can sense something is coming, but no one can necessarily
predict how profound it will be, when exactly it will show up, and when it’s
going to go away.”

Key to the formal recession designation are depth, diffusion, and duration of
economic numbers, not all of which move in tandem (or even drop at all). When it
came to the 2020 recession, for example, the NBER concluded “the subsequent drop
in activity had been so great and so widely diffused throughout the economy
that, even if it proved to be quite brief, the downturn should be classified as
a recession.”6

“Anyone—or any headline—that declares certainty about a recession is playing the
odds with too many unknowns,” Winston says. “They’re gambling with a limited set
of data.”

Your wallet: As you’re looking ahead, ask yourself what finance-related things
you can control and what you can’t, suggests Winston. No matter how far in the
future retirement is, you can create a retirement plan to get closer to your
goals. “Part of investing is about preparing for the unexpected,” Wilson says.
“The chatter is going to dominate headlines, but it’s less about the ancillary
effects and instead what you do to protect the goals you have and the things
that are important to you.”


IF THERE IS A RECESSION, WHAT CAN YOU DO? A LOT.

Everyone—you included—has a preconceived notion, based on personal history, of
how a downturn plays out. Let’s say you read a headline that predicts a
recession. What does the expert quoted in that article say the recession will
look like? Their version is probably going to look different than another expert
(and another headline).

For example, people who lived through the 1970s may remember the financial
doldrums that accompanied stagflation—slow growth and high unemployment and
prices. Adults who came of age during the Great Recession of 2008, on the other
hand, may assume a recession equals a deep, long downturn with very high
unemployment (9.5% at that recession’s worst). In 2022, it’s possible we may
already be in a recession in some form, but if we are, it doesn’t resemble
anything in recent memory, with low unemployment serving as a cushion for many.7

 

U.S. RECESSIONS, GDP, INFLATION, AND UNEMPLOYMENT, 1950–PRESENT

 

The point is, every recession is different, and how it affects you and your
family depends on both your preparation and ability to pivot. If you haven’t
been saving enough—lack of an emergency fund or a less-than-ideal retirement
savings rate—your menu of possible pivots may be more limited.

“Lately we've become conditioned to expect positive outcomes—in the markets, in
the economy, in our personal lives—but the reality is we all will have to pivot
at some point. As frightening as it can be to consider, we will all encounter
moments where we might fail,” Winston says. “It’s important to recognize that if
you don’t have a plan for what happens in both good times and bad, you will
inevitably be surprised—and nobody likes to be surprised.”

The key is realism. Not spending money probably isn’t realistic; perhaps cutting
one takeout meal per week is. “Do you understand yourself well enough to know
your limitations, and how honest can you be with yourself about what’s
acceptable and what isn’t?” Winston says.

Your wallet: Think small steps in the next few months. Have you done a budget
check-in lately? If not, you still have three-plus months in the year to adjust
and catch up in spending categories that might have taken you by surprise. In
addition, if you have some flex room in your budget, you can use it now to plan
for additional tax-savings strategies such as retirement contributions to an IRA
to complement what you’re deferring in a 401(k).


WHAT'S NEXT?

 * People often decide to work longer or save more in their retirement plans
   based on what’s happening in the economy. Are you thinking of doing the same?
   Log in to your Principal account to see if you can accelerate your savings
   plan to reach your goals. Don’t have an employer-sponsored retirement
   account? We can help you set up your own retirement savings.

The views and opinions expressed are for informational and educational purposes
only as of the date noted and should not be considered investment advice. No
forecast based on the opinions expressed can be guaranteed and may be subject to
change without notice. No investment strategy, such as diversification, can
guarantee profit or protect against loss.

Investment advisory products offered through Principal Advised Services, LLC.
Principal Advised Services is a member of the Principal Financial Group®, Des
Moines, IA 50392.

Insurance products and plan administrative services provided through Principal
Life Insurance Company®,  Securities offered through Principal Securities, Inc.,
member SIPC and/or independent broker-dealers. Investment advisory products
offered through Principal Advised Services, LLC.

© 2022 Principal Financial Services, Inc.

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