Will There Be Another Recession in 2023? Here's What History Tells Us

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KEY POINTS

  • History tells us that several factors can trigger a recession, some of which are present in today's economy.
  • Many economists warn that the high interest rates the Fed is using to tackle inflation could trigger a recession, but others are reassured by the strong jobs data.
  • The best way to handle economic uncertainty is to shore up your financial situation by building savings and paying down debt.

It is hard to read the economic tea leaves when it comes to recessions.

Wouldn't life be easy if we already knew what was going to happen to the economy in the coming weeks, years, or decades? We could make decisions about our personal finances, secure in the knowledge that life wouldn't throw us a curveball.

Unfortunately, life doesn't work that way and there's little consensus among economists about when (or whether) the next recession will arrive. Everybody's trying to read the economic tea leaves, but they all interpret the data differently.

Why is it so hard to know if we're in a recession?

Broadly speaking, a recession is a period of serious economic decline. Some countries declare a recession after two consecutive quarters of negative economic growth. Others think this is overly simplistic and other factors should be taken into account.

The U.S. has what the White House calls an "official recession scorekeeper," in the form of the National Bureau of Economic Research (NBER). It uses a mix of indicators such as employment, income, spending, and production to make the call. The only catch is that the NBER only confirms recessions once they've started -- and sometimes after they're over.

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What we can learn from previous recessions

Recessions are part of every economic cycle. History tells us that no two are exactly alike, but they all eventually pass. History also shows us what causes recessions. This includes high interest rates, a loss in consumer confidence, dramatic world events such as wars, and financial jolts, such as the collapse of the housing bubble in 2008.

If we look at those triggers through the lens of what's happening today, it is easy to see why so many economists forecast a recession. Consumer confidence is starting to fall, the geopolitical outlook is uncertain, and Russia's invasion of Ukraine has put pressure on food and energy prices around the world.

Inflation and interest rate hikes

High inflation doesn't always trigger a recession. But high interest rates often do. And rate hikes are one of the main tools the Federal Reserve is using to tackle inflation. Inflation is down from its 9.1% peak last June, but is still high. Data from the Bureau of Labor Statistics (BLS) showed average living costs in January 2023 were up 6.4% year on year.

By raising rates, the Fed hopes to slow the economy and curb rising prices. Unfortunately, it's a blunt instrument with a long-time lag, so it is difficult to know when enough is enough. Some have drawn comparisons between what's happening now and the high inflation rates of the 1970s, also known as the "Great Inflation." Back then, the Fed's aggressive rate hikes did indeed trigger a recession.

Unemployment figures

The other side of the coin is that the jobs market continues to be strong. While there have been high profile layoffs in the tech and banking sectors, the U.S. added over 500,000 jobs in January. The BLS said unemployment remained steady at 3.4%. In normal times, these figures would be reassuring. But many analysts are concerned that strong jobs data will cause the Fed to raise interest rates even more.

How to prepare for a recession

We've been hearing warnings about a potential recession for so long, it's tempting to tune them out and prioritize other things. But even if we don't enter a recession, these steps could still stand you in good stead for the future.

1. Build up your emergency fund

An emergency fund of three to six months of living expenses could tide you over if you lost your job or faced another financial crisis. Given the high levels of financial uncertainty, some experts advise saving even more right now. However, many Americans have less than $500 put aside for emergencies.

If your emergency savings aren't where you want them to be, there are steps you can take:

  1. Look at your spending. Use a budgeting app or look at your recent bank statements to map out where your money goes.
  2. Increase the gap between what you spend and what you earn. See if there are areas where you can save. Perhaps you can cut a subscription service or store-bought coffee for a while. Even stashing $10 or $20 a week into your savings account will add up over time. If you can't find ways to reduce expenses, perhaps you can take on a side hustle to earn more.
  3. Set yourself an achievable goal. Work out how much you can set aside each week or month and start to make regular contributions. You can do it manually or use an automatic transfer from your bank account.
  4. Celebrate your successes. Look for small ways to treat yourself so saving becomes more pleasurable. You might cook your favorite dinner when you save your first $500, or do something special for each month you meet your goals.

2. Pay down debt

Debt, particularly high-interest debt, can eat into your available income. Added to which, recessions often go hand in hand with higher interest rates and stricter requirements for credit cards or loans. Becoming debt free is not easy, but it can make a huge difference to your financial security.

As with building up your emergency savings, the first step is to make a plan. If you don't have any cash to spare, look at your budget to see if there's any non-essential spending you can cut. Every dollar of debt you pay down before a recession hits could make life easier, so try to be ruthless about the things you need versus those you want.

Next, make a list of all your debts, noting down how much you owe and what interest you're paying. There are different approaches you can take, but one popular route is the debt snowball method. This involves putting all your money toward the debt with the smallest balance so you get the psychological win each time you pay one down.

Another option is the debt avalanche method. Here, you'd focus on the balance with the highest interest rate first so that you pay less in interest over time. Check out our guide to paying off debt for more information on these and other debt payment strategies.

3. Take steps to safeguard your career

One of the reasons some economists are optimistic we can avoid a recession is that the job market remains relatively stable. Nonetheless, even the most dedicated of workers can find themselves out of a job when recessions strike. Take some time now to plan what you'd do if you were laid off. Dust off your resume, update your profile online, and reach out to your professional network.

If you want to continue with your current company, you could talk to your boss to stress your commitment and find out how you can contribute more. Be as proactive as you can, particularly if you have ideas that could save the business money or generate revenue.

If you want to switch to a new career, think about what skills you might need and how you might build them. Perhaps there are courses or certifications you can start now that will help you hit the ground running. Work out what transferable skills you have and how you might present them to a potential employer.

Bottom line

Given how serious the implications of a recession could be for our jobs and homes, you'd think they'd be easier to define and predict. History gives us some clues, but we've just lived through an unprecedented global pandemic and that makes it harder to forecast what might happen next. The best thing most of us can do is shore up our finances so we're ready in case a recession does arrive.

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