Two weeks ago, I debuted our novel approach to recession modelling – which accounts for the nuances that Households and Firms experience in times of economic distress. In that piece, I wrote how the US economy is presently in a “Household Sensitivity”. Now, recent forecasting by Market Theory AI suggests that Q3 and Q4 of 2022 are very likely (>80%) to be “Household Recessionary”.

Since the labour market has been relatively strong over the last year (in favour of workers), the sensitivities in Q1 and Q2 have been mostly caused by increasing inflationary pressures on household incomes and compensation. However, present levels of unemployment (3.6%; as measured in U3) are unlikely to remain this far below the non-cyclical rate of unemployment (at 4.3%) for much longer. And while we do not believe, at this time, that there will be as dramatic of an upheaval in the labour market as previously experienced with inflation, a course-correction towards the non-cyclical rate is looking likely over the next six to eight months.

So, what can families and individuals do to prepare for a household recession? Here are three things to consider:

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(1) Review Your Budget

American savings (in proportion to disposable income) reached unprecedented levels for the US economy in 2020 and 2021. And because a great many of us were cooped-up throughout the pandemic, we are, understandably, itching to get-out and spend! Unfortunately, compounded monetary policies, constrained global supply lines and this fresh wave of demand have driven inflation to forty-year highs – and now the American consumer is feeling more than just a pinch.

While it may seem trivial to say, it is anything but: Now is the time to review your week-to-week and month-to-month budgets for spending irregularities. If possible, try to set aside three months of routine expenditures (e.g. rent, mortgage payments, utilities, gas, etc.) in a high-yield savings account (I recently learnt from NerdWallet that SoFi has one of the higher rates on the market).

Will the rates help you with short-term inflation levels? Absolutely not. But, many of these accounts have variable rates, and we are expecting the federal funds rate to increase frequently and relatively sizably over the coming months (this week marked a 0.75% hike). Such activity bodes well for savers. And, in case of a financial emergency, this money will be available.

On the flip side, and if possible, now is a crucial time to start actively paying-down your debts (especially if they have variable rates). After all, whatever you may be trying to salvage on the savings side can easily be cannibalised by rising credit card interest.

(2) Review Your Portfolio

For those that are more heavily invested in high-volatility assets (e.g. stocks, cryptos, and the like), now is a good time to consider diversifying across more long-run stable or counter-cyclical assets, such as, but certainly not limited to, inflation-linked bonds, REITs, P2P and private equity. These asset classes do not have the short-run gains that a day-trader may be able to nab. And, they are certainly not as liquidable (i.e. they cannot be converted into cash as quickly) as stocks, for example. However, they do tend to perform well in times of greater economic uncertainty; and, many of them compound healthily with time.

For those interested in retail REITs and P2P, try checking-out Fundrise and Prosper, respectively, as starting points to your own research. If you are willing and able to invest into PE, I have read some positive things about Moonfare.

(3) Review Your Prospects

Lastly, the labour market is still growing and generally in favour of the employee. If you are unhappy with your current employer, and you are fortunate enough to have a more flexible schedule, now is a good time to shop around for a better fit and perhaps even a better compensation package. The market is not in a place now to drop everything without something lined-up. But, opportunities are still plentiful, and the demand for new employees is quite high.

Stay tuned and stay safe!

Disclaimer: This post is not for purposes of rendering financial advice. The content of this post is purely for educational purposes only to share my personal opinions and experiences. In order to make the best financial decision for your needs, please seek the advice of a licensed financial advisor of your choice. Know that all investments involve risk, and there is no guarantee of a return on your investment.