Recessions are scary, and most of us feel like we're already in one.
It's not just a vibe. US households have been reeling from a high cost of living, elevated prices and steep interest rates. Nothing has felt very steady about the economy since the "before times," prior to the pandemic. Is this the permanent season of uncertainty?Â
Earlier this month, we saw an increase in unemployment, watched the stock market plunge and heard that the Federal Reserve might consider an emergency interest rate cut. Economic downturns occur every several years in capitalism's roller-coaster business cycle, though their scale is never predictable. Experts constantly argue over the likelihood of a recession, and all it takes is a few investors to move entire markets, sparking further instability.Â
Today's economy is brittle, especially for those at the bottom rung. Apart from inflation and unemployment, many other factors are playing simultaneously, including geopolitical conflict and the presidential elections. There's also more than one way to measure economic hardship: credit card debt, homelessness and housing unaffordability, for example.Â
Panic is normal. So let's hear what's really going on.Â
Has unemployment increased dramatically?
When the Fed started increasing interest rates in 2022 to slow record-high inflation levels, it was clear that to meet its goal, there would need to be "pain" in the labor market (i.e., job losses). A sagging economy was part of the package, to put it crudely.Â
Though the official unemployment rate increased more than expected last month, it is still only at 4.3%, said Allison Kaminaga, an economist at Bryant University, in an email. That means it's risen less than one percentage point over the last 29 months since the Fed started aggressively hiking rates.Â
For comparison sake, during the Great Recession, official unemployment reached 5% in late 2007, doubled to 10% by October 2009 and didn't return to prerecession levels until 2015. In March 2020, the early days of the pandemic, unemployment reached 4.4% and skyrocketed to 14.8% in just one month.Â
A spiking jobless rate is always alarming. But some experts, like Colyar, say this month's data was affected by temporary factors like bad weather, specifically Hurricane Beryl, sending people out of work (despite the BLS noting otherwise). And given how low unemployment figures can also be a result of low labor force participation, Gumbinger speculates that the spike was due to more people entering the workforce.
According to Alex Thomas, senior research analyst at John Burns Research and Consulting, the Fed perceives recent labor data as pointing to a degree of "normalization" rather than an actual slowdown. "There’s a pretty big disconnect between the Fed’s view of the economy and market moves over the past few days," he said.
Of course, one could also argue there's a big disconnect between the government's labor data and the true degree of joblessness. The Bureau of Labor Statistics notoriously undercounts unemployment by not collecting information on certain groups of people, including those who have given up looking for work and those no longer able to work. Meanwhile "underemployed" workers (part-time, contract or temporary) are counted as employed, bolstering the semblance of a tight labor market.Â
According to the Ludwig Institute for Shared Economic Prosperity, which measures the percentage of the labor force that is functionally unemployed, joblessness is around six times higher than the government's average. LISEP calculates the true rate of unemployment in a range between 22.3% to 24.5% since early 2022, compared to the 3.5% to 4.3% range measured by the BLS.Â
Why does it already feel like a recession?
The most recent labor data triggered a recession indicator called the Sahm rule. According to the rule, a recession is underway if the three-month moving average of the unemployment rate is 0.5% or higher. The formula is meant to signal when the risk of a recession is elevated, not to predict recessions, and it doesn't mean a recession is inevitable.Â
"A recession is determined by more than one jobs report," said Kaminaga.Â
Notably, economic output, measured as gross domestic product, hasn't fallen: In the second quarter, GDP was 2.8% on an annual basis, double the rate in the first quarter and on par with the average growth rate over the last six quarters.Â
"It doesn't look like we are following the same downward trends observed during the last two recessions," said Nam Vu, associate professor of economics at the Farmer School of Business at Miami University.
So, the economy appears rosy, but mostly on paper. Economic growth is steady, inflation is technically receding and unemployment is historically low. Those who own assets, including stocks and property, have increased their wealth over the past few years.Â
Yet there's the ever-present divide between Wall Street and Main Street. Millions of working-class Americans experience a different economy. Instead of increasing their wealth, they’ve been stuck with stagnant wage growth, steep borrowing costs and high prices for goods, services and housing.Â
Some industries, particularly real estate and manufacturing, have been hit harder than others. Widespread layoffs in the tech sector, from startups to the powerful Silicon Valley, have taken a major toll on hundreds of thousands of workers. While GDP determines the monetary value of economic activity, it doesn't measure income inequality, affordability or the standard of living for the average worker.Â
"In terms of a recessionary period, for low- and moderate-income people, they've never fully come out of it since the 2007 Great Recession," said Gene Ludwig, former comptroller of the currency and founder of LISEP. Disadvantaged households — whose budgets are already overextended — are the most vulnerable to job loss when the economy sags even further, Ludwig told CNET.Â
What sparked the stock market meltdown? Â
Market ups and downs are normal. Investors regularly have knee-jerk reactions to job numbers, consumer prices and other economic indicators, especially when they fall short of expectations. An investor freakout could also be due to political uncertainty, natural disasters or corporate scandals. One major investor or stock can catapult the entire global market.Â
But market responses don’t necessarily portend what will happen down the road. Economic indicators are backward-looking and, as we saw this week, are often flawed when viewed in isolation.
"A day, a week, even a month or six months is not determinative of where things will go," Ludwig told CNET.Â
A few days after what was considered the worst day on Wall Street in nearly two years, stocks started to rebound. On Aug. 7, Julia Pollak, chief economist at ZipRecruiter, noted in a post on X: "Yes, the labor market is slowing. Yes, monetary policy is too tight. But recession isn’t inevitable, and rate cuts in the coming months will make a big difference. That’s why the stock market is bouncing back today."
Yes, the labor market is slowing. Yes, monetary policy is too tight. But recession isn’t inevitable, and rate cuts in the coming months will make a big difference. That’s why the stock market is bouncing back today. https://t.co/UR1w0JB8W2
— Julia Pollak (@juliaonjobs) August 7, 2024
Will the Fed cut interest rates? Â
Whatever your opinion of the Fed (and everyone has one), the central bank's mandate is straightforward: maintain maximum employment and stable prices. Its primary tool is to adjust interest rates up or down. When inflation is high, the Fed hikes interest rates to slow economic growth. In a downturn, the Fed reduces interest rates to make borrowing more affordable and stimulate the economy.Â
After more than a year of holding interest rates high, an interest rate reduction at the Fed's September monetary policy meeting is now in the bag. Some market watchers demanded one sooner, but most experts say an emergency rate cut would indicate the Fed is panicking, which would only generate more volatility.Â
"An emergency cut would send investors the wrong signal about the economy and its prospects, and that might prompt even more turbulence in financial markets," said Keith Gumbinger, vice president of mortgage site, HSH.com.
Though rare, emergency rate cuts do happen. We saw one at the start of the COVID-19 pandemic, several during the 2007-08 economic crisis and two in 2001, following the tech bubble burst and the Sept. 11 terrorist attacks. The central bank will only cut rates before its next meeting if the economy is in a full-on crisis, much like March 2020 or the Great Recession.
"The current economic situation is different from those crises," said Allison Kaminaga, an economist at Bryant University, in an email.Â
If the Fed had to intervene and cut rates before September’s meeting, it would, but data doesn't warrant that yet, Moody’s Analytics economist Matt Colyar told CNET. Colyar said it's preferable for the Fed to start easing policy at the next scheduled meeting.
Incoming economic data, however, could change the pace and degree of rate cuts. Instead of a quarter-percent cut in September, markets now predict a half-percent cut and additional cuts in November or December.Â
Can we adjust to new normals?
When interest rate cuts do happen, they'll take place over a long period of time. With lower rates, we can expect smaller returns on savings but more favorable interest rates on consumer loans, like mortgages, as well as credit cards.Â
In the world of personal finance, a key part of being smart with your money is not overreacting to what you hear in the news. Be prepared for ebbs and flows. Focus on what you can control.Â
"While it can be challenging to remain calm amid economic uncertainty, it's important to remember that what goes down will always come up," said Vu. "There is always potential for recovery."
US consumers and businesses, having been pessimistic about the economy for years, have already adjusted many of their spending and borrowing habits. According to Moody's Colyar, we won't need much prompting to hunker down dramatically.Â
CNET Money's Dashia Milden outlines four basic things you can do to prepare for an economic downturn: Build an emergency fund so you have a financial cushion. Keep your resume up to date in case of job loss. Pay down high-interest debt. Don't make any dramatic changes to your long-term investment strategy.Â
And hang tight. Economic roller coasters aren't fun.
