As high inflation persists and interest rates are rising, Americans are concerned about the current economy and a future recession. According to Nationwide’s 2023 Economic Impact survey, more than two-thirds of Americans (68%) expect a recession within the next six months and nearly 80% of those who do, expect it to be severe.
I met with Nationwide Chief Economist Kathy Bostjancic to discuss these findings, as well as her economic outlook for the remainder of the year and what tradeoffs consumers are making to afford heightened expenses.
Gary Drenik: The majority of consumers are predicting a deep recession within the next 6 months – with many expecting it to be as bad or even worse than the Great Recession of 2007-09. As an economist, what is your outlook on a recession and what would you say to people to help quell their fears?
Kathy Bostjancic: It’s understandable that consumers are fearing a recession. So far this year, we have experienced elevated inflation, trouble in the banking sector and multiple consecutive interest rate hikes. What is currently keeping us out of a recession is the strong labor market. If it continues to hold up and earnings don’t tank, we may be able to avoid a hard landing. But we’re already starting to see cracks in the labor market with a slight increase in jobless claims.
Combined with the banking sector stress caused by the recent bank failures, we are continuing to predict further tightening in credit conditions that leads to a moderate recession in the second half of this year. Consumers should know that we do not expect it to be as severe as the Great Recession though. Unlike the Great Recession, we don’t foresee a housing market collapse or a financial crisis this time around.
Drenik: The Federal Reserve just announced that it was pausing interest rate hikes. What’s your outlook for the 2nd half of the year?
Bostjancic: Following May’s Consumer Price Index report that revealed cooling inflation, it is not surprising that the Fed paused interest rate hikes this month. However, we could see them resume tightening in July in an effort to combat stubborn inflation.
We know from a recent Nationwide survey that consumers are worried about the Fed’s policies. Almost three-quarters (70%) say they are concerned about rising interest rates, up from 61% in September 2022. About the same amount, 72%, expect to see rates increase over the next year. We will continue to watch how consumers are reacting to the Fed’s moves knowing that emotional responses can have great impact on the broader economy.
As our team looks ahead to the remainder of this year and into 2024, we are expecting two or three quarters of negative real GDP growth with a rise in the unemployment rate, which currently sits at a low 3.7%. As we begin to see businesses experience reduced sales and recessionary impacts, we also expect them to cut costs. These costs, such as job losses and layoffs, will likely push unemployment up to around 5.5% by mid-2024.
Drenik: In this current economy, we know that consumers are concerned about the job market. What do you make of the May jobs report data?
Bostjancic: The May jobs report was unexpectedly positive. It showed a strong advance in payrolls and indicated that there has not been the marked slowing in hiring that we – including the Federal Reserve – were anticipating. In addition, we saw sturdy wage growth, which suggests a rise in core personal income for May.
We believe the strong labor market may push back the start of a recession but is not enough to eliminate it altogether since other leading indicators continue to point to a downturn. Additionally, if the economy remains too hot to slow inflation, we will continue to see the Fed raise rates higher, which will push us toward a downturn and potential recession.
Drenik: As consumers continue to draw down their excess savings built up during the pandemic – particularly to manage today’s high cost of living – what tradeoffs are you seeing them make?
Bostjancic: We are seeing a lot of nuanced behavior around how Americans are approaching saving and spending right now. It’s certainly true that they are continuing to spend. Many people feel like they are still catching up from the pandemic and have more traveling and dining out to do – especially as summertime approaches. In fact, 32% of U.S. adults believe they are not saving enough to meet their future needs, according to a recent Prosper Insights & Analytics survey.
However, we are seeing them make some tradeoffs that aren’t recommended. For example, Nationwide’s recent study shows that 37% of consumers have relied more on credit cards in the past year or are considering doing so to offset the higher prices of goods and services. More than one in ten (11%) have reduced their retirement plan contributions in the past year and 13% are considering doing so soon.
Although these behaviors are not healthy for long-term financial stability, they are not surprising considering Americans’ current confidence in their finances. According to a recent Prosper Insights & Analytics survey, about 39% of U.S. adults feel somewhat or very insecure about their overall financial security.
Drenik: What are some mistakes you see people make when trying to manage their daily lives in this tough economy?
Bostjancic: One of the main mistakes we see from consumers is a lack of long-term thinking, especially when they are experiencing rising expenses and high inflation. This often leads to emotional changes in financial behaviors and can be difficult for Americans to navigate on their own.
We found that one in ten (10%) consumers are concerned about making poor purchasing or investment decisions. This is higher for Gen-Z at 15%. In the past twelve months, we have already seen consumers make difficult decisions to keep their everyday expenses down, especially in the insurance sector. For example, 10% of consumers report having decreased coverage and/or limits on existing insurance policies within the past 6 months and 23% have looked for ways to save money on premiums with their existing insurance policies.
In this tough economy, it is critical for consumers to take a step back and consider potential long-term effects before making any rash financial decisions.
Drenik: What sources are people relying on to help manage their finances amid recession fears?
Bostjancic: Understandably, most Americans turn to friends and family for financial advice. This is true for almost half (48%) of consumers and two-thirds (66%) of Gen-Z. Another big one is online resources with about a quarter (26%) of consumers seeking advice there.
However, we always encourage people to look to the pros for help. Working with a financial advisor can help people prepare for short-term headwinds while building a plan for long-term financial stability.
Drenik: Thank you, Kathy, for sharing your insights on the current economic landscape and what we can expect to see in the second half of 2023. We appreciate your time here today.
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