Recession Warnings Keep Coming. How Worried Should We Be?

For months, financial experts have been warning consumers to prepare for a recession in 2023 or 2024. And those warnings can be frightening.

After all, recessions have the potential to lead to an uptick in unemployment. And the thought of losing your job might be enough to make you lose sleep. But while recession warnings might persist, the reality is that economic data doesn't seem to indicate that a broad decline is right around the corner.

The economic numbers look good

Higher levels of unemployment are often an indication that a recession is imminent. But in July, the U.S. unemployment rate was just 3.5%, and 187,000 new jobs were added to the economy. That's encouraging news.

Meanwhile, in July, the Consumer Price Index (CPI) rose 3.2% on an annual basis. That marks an uptick from June, when annual inflation was measured at just 3% based on that month's CPI. But all told, 3.2% inflation isn't so extreme. While it might lead to another interest rate hike from the Federal Reserve this year, that hike shouldn't be drastic.

A big reason experts have been warning of a recession is that the persistent rate hikes by the Fed have the potential to lead to a decline in consumer spending. And if spending is curbed to a notable degree, the broad economy could suffer. But while it's gotten more expensive to borrow money, whether in the form of a loan or credit card balance, consumers don't seem to be cutting back.

Consumer sentiment that the University of Michigan tracks rose 11% in July compared to the prior month, reaching its highest level since October 2021. And consumer spending rose 1.6% during the second quarter of the year, despite higher borrowing costs.

In other words, consumers do not seem to be pulling back on spending, and they seem confident in the economy. That's hardly the sort of data you'd expect right before a recession.

It pays to prepare for a recession

While economic data does not seem to point to a near-term recession, the reality is that it's a good idea to be ready for one at all times. And one of the best ways to do that is to have a fully loaded emergency fund.

Having enough cash in your savings account to cover three months' worth of bills or more could put you in a strong position to get through a period of job loss. It could also be your ticket to avoiding debt at a time when it's gotten expensive to borrow.

And speaking of debt, now's a good time to whittle yours down. If economic conditions do sour, the last thing you'll want is the stress of expensive monthly payments hanging over your head.

At this point, the idea of a 2023 recession is seeming less likely. But that doesn't mean we're out of the woods. And even if a recession doesn't hit in 2023, there's no guarantee we won't experience one next year. So it's best to prepare for that possibility, and doing so could actually make the next recession warning you hear a lot less scary.