Consumers Bracing For A Deep Recession, According To New Survey

With inflation remaining high and interest rates on the rise, Americans are increasingly worried about the current state of the economy and the possibility of a recession in the near future. Data from the 2023 Economic Impact survey conducted by Nationwide reveals that over two-thirds of Americans (68%) anticipate an economic downturn within the next six months, and nearly 80% of those individuals anticipate that it will be a severe one.

I had the opportunity to have a discussion with Kathy Bostjancic, the Chief Economist at Nationwide, regarding these results. The conversation also included her predictions for the economy for the rest of the year and how consumers are managing to pay for increased expenses by sacrificing certain things.

Gary Drenik expressed that most people believe that there will be a significant economic decline in the next half-year. The expectations are so high that some anticipate it will be as severe as the recession that occurred from 2007 to 2009. As an economist, what is your perspective regarding this projected recession, and what advice would you give to alleviate people's anxiety?

Consumers are worried about a recession, which is reasonable given the events of this year. We've seen high inflation, problems in the banking industry, and multiple interest rate increases. However, the strong labor market is currently preventing us from entering a recession. As long as the labor market remains stable and earnings don't decrease significantly, we may be able to avoid a difficult situation. Unfortunately, we're beginning to see some issues arise in the labor market, with a slight uptick in jobless claims.

When we look at the current situation in the banking sector, it's clear that recent bank failures have put a lot of pressure on it. This, in turn, is causing us to think that credit conditions will continue to tighten. As a result, we're anticipating that there will be a moderate recession in the latter half of the year. That being said, it won't be as severe as the Great Recession. It's important for the public to understand that this time around, there won't be a housing market crash or a financial crisis like we saw previously.

Drenik inquired about the Federal Reserve's latest announcement of halting interest rate hikes and asked for predictions regarding the second half of the year.

Bostjancic: After knowing that the inflation has eased down as per May's Consumer Price Index report, it is not a shock that the Fed has paused increasing interest rates this month. Still, there might be possibilities of restarting the tightening of rates in July to deal with the persistent inflation.

According to a recent survey conducted by Nationwide, consumers are feeling uneasy about the policies implemented by the Federal Reserve. A large majority (70%) of respondents expressed their concern about the rise in interest rates, which is an increase from the 61% reported in September 2022. Furthermore, about 72% of the participants expect to see an increase in interest rates over the course of the next year. We will be keeping a close eye on the public's reaction to the Federal Reserve's decisions since we understand that emotional responses can significantly affect the general economic landscape.

Looking forward to the rest of this year and the next few years, our team predicts a possible decrease in real GDP growth for two to three quarters, resulting in an increase in unemployment from its current low rate of 3.7%. As businesses start feeling the effects of a recession, they may start cutting back on expenses, which could include job cuts and staff layoffs. Due to these measures, we believe that unemployment could potentially climb up to approximately 5.5% by the middle of 2024.

Drenik: Considering the present economy, it's clear that individuals are apprehensive about the employment opportunities. What is your opinion about the employment data that was reported in May?

Bostjancic was surprised by the May jobs report as it turned out to be quite positive. The report indicated that there has not been a significant decline in hiring, which was something even the Federal Reserve had predicted. Moreover, the report highlighted noticeable progress in payrolls, leading to a strong indication of sturdy wage growth. This indicates a rise in core personal income for the month of May.

We think that the robust job market could delay the onset of a recession, but it's not sufficient to completely avert it as different significant indicators are still signaling a downturn. Furthermore, if the economy remains exceedingly heated and inflation doesn't cool down, the Federal Reserve will keep escalating interest rates, which might lead us to a downturn and possible recession.

Drenik is asking about the type of sacrifices consumers are making as they use up their pandemic savings to cover expensive living costs.

Bostjancic stated that Americans are displaying complex behaviors when it comes to their savings and spending habits at present. Despite the ongoing pandemic, people are still splurging their finances. This may be because they feel like they missed out on many experiences during the pandemic and want to make up for it - particularly with summer fast approaching. However, a recent survey by Prosper Insights & Analytics has shown that 32% of adults in the United States believe that they are not saving enough money to secure their future needs.

Prosper - Saving Ample for Future Necessities It is important to have a good financial plan to ensure you prosper in your future. One of the best ways to achieve this is by saving enough money to cater for future needs. This is because life is unpredictable and tomorrow may bring unexpected situations, such as medical emergencies or job loss. Saving adequate money guarantees that you have a financial safety net and are well-equipped to handle any unexpected occurrences. You can classify your future needs into short-term and long-term goals and allocate funds accordingly. Short-term goals may include an emergency fund or a down payment for a house or car, while long-term targets may consist of retirement savings or funding your children's education. The most crucial aspect of saving for your future is to start early. This is because the earlier you start saving, the more time your money has to generate interest, which can help grow your savings exponentially. It is also essential to set specific saving goals and stick to them, even when faced with the temptation to splurge. In conclusion, saving enough money ensures that you prosper in your future and have a secure financial future. Start saving now to prepare for any future uncertainties and to achieve your long-term goals.

Nonetheless, we've noticed that some people are making some questionable sacrifices. According to a new report by Nationwide, approximately 37% of consumers have either increased their usage of credit cards in order to counterbalance the rise in prices for products and services, or are thinking of doing so. Moreover, over 10% have decreased their retirement plan contributions over the past year, and roughly 13% are contemplating doing so in the near future.

It's not good for your financial future, but it's not unexpected given how Americans feel about their finances. A survey from Prosper Insights & Analytics found that 39% of American adults feel somewhat or very unsure about their financial stability.

Prosperity - Complete Financial Stability.

Drenik asks, "What are some errors that individuals commonly make when attempting to handle their day-to-day routine during the challenging financial circumstances?"

Bostjancic points out that a common error made by consumers is not considering the future enough, particularly when faced with increasing costs and inflation. This can cause them to react emotionally and alter their financial habits, which can be a challenge to handle solo.

Through our research, we discovered that 10% of consumers have worries about making unwise purchasing or investment choices. Particularly, among Gen-Z, the proportion rises to 15%. Over the last year, a considerable number of consumers had to make tough financial decisions to save on daily expenses, particularly regarding their insurance coverage. As an illustration, 10% of consumers have lowered their policy coverage within the past six months, while 23% have searched for means to reduce premiums on their existing insurance policies.

During these difficult financial times, it's important for individuals to pause and carefully reflect on the possible consequences before making any impulsive decisions related to their finances.

Drenik's query is about which resources people are utilizing to handle their finances during the dread of recession.

Bostjancic made a point that it's typical for Americans to seek financial advice from their loved ones. This applies to nearly half of consumers, and even more so for 66% of Gen-Z. Additionally, many people rely on online resources, with roughly 26% of consumers looking for guidance there.

Nevertheless, we strongly suggest individuals seek assistance from experts. Collaborating with a financial consultant enables individuals to brace themselves for short-term setbacks while devising a strategy for long-lasting fiscal security.

Drenik expressed gratitude to Kathy for kindly providing her viewpoints on the current state of the economy and what the future has in store for us in the latter half of 2023. We are thankful for her valuable presence with us today.