A customer shops at a Kroger grocery store on July 15, 2022 in Houston.
Brandon Bell | Getty Images
While experts debate whether the US is on the brink of an economic recession, many Americans are already preparing for a recession.
So far, 66% of Americans worry that a major recession is just around the corner, compared with 48% who said the same a year ago, according to a survey by North American life insurer Allianz.
One important reason is that people fear high inflation, which has pushed up the prices of goods and services.
The survey found that 82% worry that inflation will negatively affect their purchasing power in the next six months. Moreover, the same number of respondents said that they expect inflation to worsen in the next 12 months.
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At the same time, 71% said that their wages are not keeping up with the increase in costs.
(Allianz Life conducted an online survey in June and surveyed just over 1,000 people.)
Data released last week by the US Commerce Department only fueled fears of a recession, with gross domestic product falling for the second straight quarter, a traditional sign of a recession.
However, Art The White House quickly rejected it speculation that a recession is already here, and President Joe Biden citing record low unemployment, among other factors.
According to government data released last week, consumer spending rose 1.1% in June due to higher inflation.
Still, as fears of a recession mount, it may already be forcing Americans to change the way they handle their money.
Why the recession may be caused by consumers
According to Jonathan Pingle, chief U.S. economist at UBS, consumer spending has remained fairly flat over the past seven months, even with the latest data.
Households were in good shape at the start of the year with excess savings and strong gains in the labor market. But then high gas prices and rising interest rates were combined.
“Overall, it’s just proven that the trajectory of consumer spending is much weaker than I think most people expected,” Pingle said. “Where we’re sitting right now is a bit of a stretch for the economy.”
The big question that experts are debating right now is whether the country is in a recession.
The UBS model currently has a 40% chance of a recession in the next 12 months. The slowdown in GDP in the first quarter had some “really noisy” components in payback for a strong fourth quarter in 2021, Pingle said, making the reason for the quarter-on-quarter drop still unclear.
According to a recent UBS research report, a consumer-driven recession is one way the US economic downturn is unfolding. Another scenario could be caused by excessive tightening by the Federal Reserve.
If consumer spending falls, it could be a shock to confidence, Pingle said. This could be caused by households increasing precautionary savings, worrying about the future and postponing purchases.
Of course, building up savings and cutting back on spending is advice commonly given to individuals who want to limit the impact of an economic downturn on their finances.
“Pay down your debt, grow your savings and keep making those retirement contributions through the ups and downs,” said Greg McBride, senior vice president and chief financial analyst at Bankrate.com.
“In the long run, when you look back, you’ll be very glad you invested in 2022,” he said.
How recession worries differ by generation
However, a recent survey by Allianz Life found that 65% of investors say they keep more money in the market than they should due to fear of losses.
For baby boomers, the No. 1 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 it as a concern in the first quarter.
“A downturn like this, combined with this type of inflation for someone who’s just retired, can really deplete your assets much faster than you ever expected,” said Kelly LaVine, Allianz Life’s vice president of consumer affairs.
Gen Xers are most concerned that their incomes are not keeping up with rising spending, cited by 75% of respondents, up from 68% in the first quarter.
A recession like this, combined with this type of inflation for someone who just retired, can really drain your assets much faster than you ever expected.
vice president of consumer ratings for Allianz Life
At the same time, fewer and fewer millennials have a financial plan to handle rising inflation. The survey found that 56% currently have such a plan, up from 61% in the first quarter.
For all people, developing a financial plan can help limit the impact of economic uncertainty, LaVine said.
“Regardless of whether you think you have enough money, there’s a financial advisor that’s right for you,” LaVine said. “And it’s never too early and certainly never too late.
“Not having a plan is the worst thing you can do,” he added.