Why Haven't High Borrowing Costs Caused a Recession?

In 2022, many economists were sounding warnings about a 2023 recession. And last year, economists were continuing to warn about a downturn in 2024.

But thankfully, we've made it to April and economic data seems strong. March's jobs report well exceeded economists' expectations, and unemployment is low.

In fact, in President Joe Biden's recent State of the Union address, he said, "I inherited an economy that was on the brink. Now our economy is the envy of the world."

But while today's economic situation is one to be thankful for, the reality is that it is sort of surprising. Recent economic conditions weren't exactly pointing to such a strong 2024. But there are a couple of key reasons why we've managed to avoid a recession thus far.

Interest rate hikes didn't wreck the economy as expected

A big reason so many experts were convinced we'd hit recession territory in 2023 or 2024 was that the Federal Reserve spent much of 2022 and 2023 implementing interest rate hikes to cool inflation. All told, there were 11 rate hikes that arrived in short order, making it more expensive for consumers to do everything from carry a credit card balance to sign an auto loan.

Often, when the cost of borrowing increases exponentially in short order, consumers stop doing it and instead cut their spending. And reduced spending has the potential to lead to an economic slump. But that didn't happen this time around, and there are a couple of reasons why.

First, as mentioned, unemployment has remained low. That's helped sustain consumer spending even during a period when it's been more expensive to borrow.

Also, the economy has held up well overall, helping consumers maintain their spending even at a time when inflation was surging and the cost of signing a loan was downright exorbitant. We didn't have an economic meltdown or banking crisis like we did during the Great Recession.

It's still a good idea to prepare for a recession

At this point, economists have largely backed off of warnings for a 2024 recession. And based on current conditions, a notable downturn looks unlikely this year.

But sometimes, recessions have a sneaky way of happening when you'd least expect them to. So it's always a good idea to be recession ready.

To that end, check up on your savings and make sure you have enough money in the bank to pay for three months of essential living expenses at a minimum. Recessions and job loss tend to go hand in hand, and it might take at least three months to find a job if yours is cut.

Also, do your best to chip away at high-interest debt. Not only can this save you money, but having smaller monthly debt payments could be a lifeline at a time when your income might disappear for a few months.

What's more, since the economy is strong now, you may want to pick up a side hustle to boost your savings. That side gig is also one you can potentially fall back on should a recession strike and compromise your main source of income.

Finally, make an effort to grow your professional network and job skills. The more people you know in your industry and the more knowledge you bring to the table, the easier it might be to find work if your company is forced to downsize.

Many economists were convinced that higher borrowing costs would have fueled a recession by now. But just because we seem to have avoided that fate at this point doesn't mean things won't eventually take a negative turn. Prepare for that possibility so that if a recession does hit, you're in a stronger position to get through it.