4 reasons the economy looks like it’s crumbling
The truth is that we’re probably not in recession now (although it’s possible), but there are plenty of signs that one is around the corner.
Sign 1. The Fed is hiking rates
Inflation has been rampant, and the Federal Reserve’s tool to fight surging prices lies in its ability to set interest rates higher. That makes borrowing more expensive and slows the economy down — on purpose.
The problem is the Fed was super-duper late to raising rates. Inflation was a growing concern throughout 2021, but the central bank only began hiking rates in March 2022. So the Fed needs to play catchup — and take far more drastic action than it would if it had started raising rates last year.
Fed Chair Jerome Powell said this month the central bank would continue to raise rates by half a percentage point at the conclusion of each meeting until it’s satisfied inflation is getting under control — and then the Fed would continue to raise rates by a quarter-point for a while.
Sign 2. The stock market is in sell-everything mode
Concerned that higher interest rates will erode companies’ profits, investors have been heading for the exits.
That’s 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 growing in a practically straight line for the better part of the decade. And it’s not great for consumer sentiment, either.
That’s potentially bad news for the economy, because consumer spending makes up more than two-thirds of America’s gross domestic product.
Sign 3. The bond market
When investors aren’t so hot on stocks, they’ll often switch to bonds. Not this time.
That typically happens when the Fed hikes rates — the higher cost of borrowing makes the bonds less valuable when they mature, so a higher interest payment on the bonds (the yield) will help compensate and make them more attractive to investors.
Bonds have also sold off as the Fed has decided to unwind its massive portfolio of Treasuries that it had been purchasing since the pandemic to shore up the economy.
Sign 4. Chaos around the globe
What happens abroad could spill over to the United States, too, hurting America’s economy at the worst possible time.
What to do
Lock in a new job now: With ultra-low unemployment and plenty of openings, it’s a job seeker’s market. That could change quickly in a recession.
Cash in on the housing boom: If you’ve been on the fence about selling your home, now may be the time to list. Home prices in the United States are up nearly 20% year over year, but mortgage rates are also rising, which will eventually curb demand.
Set some cash aside: It’s always a good idea to have liquid assets — cash, money market funds, etc — to cover urgent needs or unexpected emergencies.
Finally, some sage advice for any market: Don’t let your emotions get the better of you. “Stay invested, stay disciplined,” says certified financial planner Mari Adam. “History shows that what people — or even experts — think about the market is usually wrong. The best way to meet your long-term goals is just stay invested and stick to your allocation.”
— CNN Business’ Allison Morrow and Jeanne Sahadi contributed to this report.