A customer shops at a Kroger grocery store on July 15, 2022 in Houston.
Brandon Bell | Getty Images
As experts wonder if the United States is on the verge of an economic downturn, many Americans are already preparing for a recession.
At this point, 66% of Americans fear a major recession is imminent, up from 48% who said the same a year ago, according to a poll by Allianz Life Insurance Company of North America.
One of the main reasons is that people fear high inflation, which has driven up the prices of goods and services.
The survey found that 82% fear inflation will negatively impact their purchasing power over the next six months. Moreover, the same proportion of respondents said they expected inflation to worsen over the next 12 months.
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Meanwhile, 71% said their salaries were not keeping pace with rising expenses.
(Allianz Life conducted the survey online in June and interviewed just over 1,000 people.)
Data released last week by the US Commerce Department only further stoked fears of a slowdown, with gross domestic product shrinking for a second straight quarter, a traditional signal of a recession.
However, the White House was quick to dismiss speculation that a recession is already here, with President Joe Biden citing record unemployment, among other factors.
Consumer spending rose 1.1% in June on higher inflation, according to government data released last week.
Yet as recession fears grow, it may already be prompting Americans to change the way they manage their money.
Why a recession could be consumer-led
Even with the latest data, consumer spending has been pretty flat over the past seven months, according to Jonathan Pingle, chief US economist at UBS.
At the start of the year, households were in good shape with excess savings and solid labor market gains. But then high gasoline prices and rising interest rates piled up.
“Overall, it turned out that the trajectory of consumer spending was much weaker than most people expected,” Pingle said. “The current situation is somewhat precarious for the economy.”
The big question currently being debated by experts is whether or not the country is already in recession.
UBS’s probability model currently has a 40% probability of a recession in the next 12 months. There were “really loud” elements to the first-quarter GDP slowdown, which were rewarded with a strong fourth quarter in 2021, Pingle said, making the reason for the quarter-over-quarter declines still inconclusive.
According to a recent UBS research report, a consumer-driven recession is one way in which a US slowdown could occur. Another scenario could be caused by excessive tightening by the Federal Reserve.
If consumer spending pulls back, it could be a confidence shock, Pingle said. This could be driven by households increasing their precautionary savings as they worry about the future and postpone purchases.
Certainly, increasing your savings and reducing your expenses are the advice generally given to people who wish to limit the impact of an economic slowdown on their finances.
“Pay down your debt, grow your savings, and keep making those retirement savings contributions through the ups and downs,” said Greg McBride, senior vice president and chief financial analyst at Bankrate.com.
“Long term, when you look back, you’ll be really happy you invested in 2022,” he said.
How recession worries vary across generations
Yet a recent Allianz Life survey found that 65% of investors say they keep more money than they should out of the market due to fears of loss.
For baby boomers, the top concern, cited by 73%, is that they won’t be able to afford the lifestyle they want in retirement due to rising costs. That was up from 66% who cited this concern in the first quarter.
“Having that kind of downturn coupled with that kind of inflation for someone who’s just retired can really deplete your assets a lot faster than you expect,” said Kelly LaVigne, vice president of consumer insights at Allianz. Life.
For Gen Xers, the biggest concern is that their income is not keeping up with rising costs, cited by 75% of respondents, up from 68% in Q1.
Meanwhile, fewer millennials have a financial plan in place to deal with rising inflation. The survey found that 56% currently have such a plan, up from 61% in the first quarter.
For all individuals, making a financial plan can help limit the effect of economic uncertainty, LaVigne said.
“Whether you think you have enough money or not, there’s a good financial advisor for you,” LaVigne said. “And it’s never too early and it’s certainly never too late.
“Not having a plan is the worst thing you can do,” he added.