Experts are raising the recession alarm. Here's how to prepare

Economists are increasingly worried about a downturn in the next year

Brian Carlton

By 

Brian Carlton

Brian Carlton

Contributing Writer

Brian Carlton is a freelance writer and editor based in Virginia. He covers housing, finance, and other topics. 

His work has been featured in national and global outlets like NPR, The Associated Press, and the BBC. 

When not at work, you'll likely find him planning another trip. An avid traveller, Carlton someday hopes to visit every continent. He's halfway to that goal. 

Published April 15, 2022 | 3 min read

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In the first week of April, Deutsche Bank, Goldman Sachs and several other financial institutions all increased their estimates that a recession is coming. In an April 5 note to customers, Deutsche Bank predicted a recession in the early months of 2023. Three days prior, Goldman Sachs said there’s a 38% chance of a recession, possibly later this year. Financial ratings company Fitch issued a similar warning back in March

Here’s what’s behind these predictions and what to do to prepare for a recession.

The growing threat of inflation

Prices climbed 8.5% higher in the 12 months ending in March. [1] It’s the biggest year over year inflation spike in 40 years. You have to go back to January 1982 to find a similar increase. Energy prices, which have increased 50% over the past year, have been a particular strain on the economy.

The Federal Reserve Bank in March approved a 0.25% increase on the federal funds rate, a key index for interest rates across the economy. [2] They also agreed to consider additional hikes this year. Higher interest rates can combat inflation by making people less inclined to spend and more inclined to save, but economists warn the timing and size of rate increases could risk slowing down the economy too much.

“It’s kind of like herding cows,” says John Connaughton, a professor at the UNC-Charlotte Belk School of Business. “If you run after the cows, they’re going to run away from you. You’ve got to get out in front of them. We need to aggressively increase interest rates, to get out in front of inflation.” 

How the Fed is responding 

Many experts worry the Fed won’t get the balance right. Reuters news service polled more than 100 economists from April 4 to April 8. Eight-five of the 102 polled expect the central bank to raise rates rapidly, but a majority also say there’s a 40% chance of a recession in the next 24 months.  [3]

Jeremy Powell, chair of the Federal Reserve, downplayed the risk of a downturn in a March press conference. 

“In my view, the probability of a recession in the next year is not particularly elevated,” he said. Powell pointed to the strong labor market — the unemployment rate is just 3.6% —  and the high savings levels of households and businesses.

Analysis from Morgan Stanley and T. Rowe Price also predicts the challenges facing the economy will fade. They say the global supply chain will recover in time to ease inflation and avoid a full recession.

What should investors do? 

With all that in mind, financial planners say it’s time to prepare for the worst and hope for the best. To do that, people need to evaluate their investments and determine how much risk they’re willing to take. 

“To attain long-term goals such as retirement, this usually requires taking risk in the form of investment in equities,” says Erik Baskin, a certified financial planner in Ohio. “This risk really plays out in recessions and it is truly a gut check for investors. If you are in a 100% stock portfolio, you can’t be surprised when your portfolio goes down by 30% or more during a recession. That is what you signed up for when you put your entire portfolio into stocks.”

Step one is determining how much risk you’re willing to take. Once you do that, it’s time to consider diversifying. If you’re concerned about a recession, planners say you need to look at companies with good cash flow, low debt and a record of strong balance sheets. A financial professional can help you select good investments.

“Having a mix of safer and more aggressive investments allows investors to weather the storm no matter what the economy does in the short-term,” says Robert Persichitte, a financial planner in Colorado.

If you’re investing for the long term, it’s best not to pay attention to the short-term ups and downs of the market. There will likely be plenty of declines during a recession, but those who stay the course will see investments climb back up once it’s over.

Image: Stefano Madrigali / Getty Images