If you believe Janet Yellen, the chances of a U.S. recession this year are low. The Treasury Secretary recently told CNN, "You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in 50 years."
Yellen makes a pretty good argument. But there's also a strong case to be made that a recession could be more likely now. Here's why -- and what investors should do if a recession is on the way.
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Why the odds of a recession could now be higher
Austan Goolsbee knows a lot about recessions. He served in former President Barack Obama's cabinet and has been an economics professor at the University of Chicago. And he's currently president of the Federal Reserve Bank of Chicago. Goolsbee said in an interview last year that more than two-thirds of the U.S. recessions since World War II "were caused by the Fed raising the interest rate faster than the economy can handle."
History doesn't always repeat itself, of course. However, if a recession is on the way in 2023, the most likely culprit will be the one Goolsbee singled out -- Federal Reserve interest rate hikes.
For a while, it looked like the Fed might ease up on rate hikes. Now, though, there are two reasons to suspect that might not be the case.
First, the jobs report referenced by Yellen showed that the economy doesn't appear to be slowing down. It spurred Federal Reserve Chairman Jerome Powell to comment that more rate hikes will be needed to control inflation. Powell also warned that more aggressive increases could be required if inflation remains high.
That leads us to the second recent report. Although the annualized inflation rate in January fell to 6.4% from 6.5% in December, core prices rose 0.4% from the previous month. Also, the government revised its inflation numbers for the previous three months. The result was that inflation was higher than originally thought at the end of 2022.
Putting these two reports together indicates that the Fed could be more hawkish on interest-rate hikes than investors prefer. And that increases the odds of a U.S. recession.
Smart moves for investors
What should investors do if a recession is around the corner? I think there are several smart strategies.
One good move is to buy Series I savings bonds (often referred to as "I-bonds"). The "I" stands for inflation. The interest rates for these savings bonds are set based on the inflation rate.
With inflation likely to remain stubbornly high for the immediate future, I-bonds give you an opportunity to make a 6.89% return. Note, though, that this rate could be higher or lower, depending on what the inflation rate is on May 1, 2023 and Nov. 1, 2023.
Another prudent approach is to invest in stocks that are practically recession-proof. Three areas you might want to focus on are consumer staples stocks, healthcare stocks, and utility stocks. These types of industries tend to hold up well during recessions because they sell products and services that customers will continue buying, even during an economic downturn.
There are plenty of stocks to consider buying, but I'll highlight a few examples. Procter & Gamble (PG 0.14%) ranks as one of the best consumer staples stocks with products such as Crest toothpaste, Gillette razor blades, and Tide detergent. Vertex Pharmaceuticals (VRTX 0.86%) markets cystic fibrosis drugs that physicians will prescribe and patients will take no matter what happens with the economy. Brookfield Infrastructure (BIP 1.08%) (BIPC +0.00%) operates electric and natural gas transmission and distribution businesses, toll roads, data centers, and other infrastructure assets that should generate steady revenue, even during a recession.
NYSE: BIP
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The best strategy of all
The best strategy of all for investors, though, is to simply have a long-term perspective. Buy stocks and exchange-traded funds that you can comfortably own for a decade or more.
Recessions usually don't last very long. Since World War II, the average period of U.S. economic downturns was around 10 months. Stocks often begin to rebound well before a recession ends.
Maybe Janet Yellen is right that the U.S. will avoid a recession. If so, you wouldn't want to miss out on what could be a good year for the stock market. But she could be wrong. Keeping the long term in mind, rather than focusing only on the short term, should improve your chances of making money whether or not a recession materializes this year.
