May 20, 2022

4 Reasons the Economy Looks Like It's Collapsing - And What to Do About It

4 Reasons the Economy Looks Like It’s Collapsing – And What to Do About It

Pretty much anyone who wants a job can get it. The economy is so hot that Prices go up Faster than at any time since the 1980s. The housing market is on fire. Consumers spend crazy.
Yet we keep hearing the word “Recession“It’s like 2007 again. What gives?

The truth is, we’re probably not in a recession right now (although it is possible), but there are plenty of indications that one of them is right around the corner.

Signing 1. The Fed will raise interest rates

Inflation was rampant, and the Federal Reserve’s tool to fight price increases was its ability to raise interest rates. This makes borrowing more expensive and slows the economy – on purpose.

The problem is that the Fed has been very disingenuous too late in raising interest rates. Inflation has been a growing concern throughout 2021, but the central bank only started raising interest rates in March 2022. So the Fed needs to catch up — and take tougher action than if it had started raising rates last year.

Last week, the Federal Reserve raised interest rates by half a percentage point Biggest single rate hike in 22 years.

Federal Reserve Chairman Jerome Powell said this month that the central bank would continue to raise interest rates by half a percentage point at the close of each meeting until it was satisfied that inflation was under control — and then the Fed would continue to raise rates by a quarter point over a period.

The Fed is convinced that it can raise interest rates without plunging the economy into recession. But this so-called soft landing has proven elusive in the past, and many Wall Street banks think The Fed will engineer a recession to beat inflation.

2. The stock market is in the mode of selling everything

Intense fear is the feeling on Wall Street this year. CNN Business Fear and Greed Index She is six out of 100.
More than $7 trillion has been wiped out from the stock market this year
After hitting record highs in early January, the stock market lost nearly a fifth of its value — sending stocks close to bear market territory. The Nasdaq (COMP) It is already deep in a bear market. more than $7 trillion has evaporated from the stock market this year.

Fearing that higher interest rates will erode corporate profits, investors are turning to the exit.

This is bad news for people’s retirement plans. It’s also unwelcome news for a number of investors who rely on the market for income, including day traders who have counted on the stock market’s growth in almost a straight line during the better part of the decade. It’s also not great for consumer sentiment.

Although a minority of Americans actively invest in the stock market, when they see a sea of ​​red next to a CNN tape or on their phone screens, it has historically made people stop. Consumer confidence It fell to an 11-year low in May.

This is potentially bad news for the economy, because consumer spending makes up more than two-thirds of America’s GDP.

Signature 3. Bond market

When investors aren’t very interested in stocks, they often turn to bonds. Not this time.

Safe US Treasuries are selling off. When bond prices go down, yields go up – 10-year Treasury yields go up Topped 3% this month For the first time since 2018.
How long will inflation last?  The answer lies in the past

This usually happens when the Fed raises rates – the higher cost of borrowing makes bonds less valuable when they mature, so paying the bond’s higher interest (yield) will help offset it and make it more attractive to investors.

Bonds were also sold as the Federal Reserve decided to unwind its huge portfolio of Treasuries it has been buying since the pandemic to prop up the economy.

With bonds selling and investors increasingly fearful of an economic downturn, the gap between short-term and long-term bond yields is narrowing. Two-year Treasury yields briefly rose above Those included in the standard 10-year bond in March for the first time since September 2019. The so-called Inversion of the yield curve Every recession since 1955 has preceded it, resulting in a “false positive” only once, according to the San Francisco Federal Reserve.

Sign 4. Chaos around the world

None of this happens in a vacuum. Russia continues its deadly invasion of Ukraine, which has brought supply chains to a standstill and Send energy prices to the ceiling. China continues to lock down some of its largest cities as COVID-19 cases remain high. Labor shortages have raised salaries and impeded the normal flow of goods around the world.
Russia continues to threaten European countries by halting energy shipments, which could plunge the economies of the European Union into recession. China’s economy has slowed down dramatically Because it is keeping workers at home as part of its Covid-free policy.

What happens abroad can spill over to the United States as well, hurting the American economy at the worst possible time.

what should be done

Well, a recession may be near. here what or what not Must do: panic.
Even if a recession is inevitable, there is no indication how severe it will be. But planning for the worst never hurts. here Few ways financial advisors say You can protect your money from deflation.

Securing a new job now: With extremely low unemployment and an abundance of job opportunities, it is a market for job seekers. That can change quickly in a recession.

Take advantage of the housing boom: If you’re on the fence about selling your home, this might be a good time to put it on the list. Home prices in the US are up nearly 20% year over year, but mortgage rates are on the rise as well, which will eventually dampen demand.

Put some money aside: It is always a good idea to have liquid assets – cash, money market funds, etc. – to cover urgent needs or unexpected emergencies.

Finally, some wise advice for any market: Don’t let your emotions control you. “Stay invested, and be disciplined,” certified financial planner Mary Adam says. “History shows that what people – or even experts – think about the market is usually wrong. The best way to achieve your long-term goals is to keep investing and stick to your custom.”

CNN Business’s Alison Morrow and Jane Sahadi contributed to this report.