The U.S. economy contracted in the quarter from April to June, the Bureau of Economic analysis reported Thursday. After a 1.6% year-over-year decline in U.S. gross domestic product in the first quarter, the second quarter’s 0.9% fall marked two consecutive quarters of negative GDP growth — a widely cited rule of thumb to indicate that the economy has entered a recession.
Officially, though, it hasn’t. Not yet, anyway. The National Bureau of Economic Research (NBER) is in charge of declaring recessions and expansions and likely won’t make a judgment for months. And when it does, GDP — a broad measure of economic activity — will only be one of the many factors the bureau’s economists will consider.
“Great,” you may be thinking. “But what do I do in the meantime?”
While it’s worth making sure you’re prepared financially for economic turmoil, the most important move may be simply not to panic and make big changes to your investing strategy, says Jim Paulsen, chief investment strategist for the Leuthold Group.
Here’s what financial experts say about the current economic picture, and what you can do if you worry a recession may be imminent.
Even if the NBER hasn’t officially declared a recession, that won’t stop journalists, politicos and Twitter debaters from saying the economy is in one.
“Don’t confuse headlines with underlying data,” says Brad McMillan, chief investment officer for the Commonwealth Financial Network. “People might call this a ‘technical’ recession, and that’s because it doesn’t really meet a lot of the criteria.”
By the NBER’s official definition, a recession is marked by “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
It’s hard to say that certain, major aspects of the economy are in decline, says Paulsen. “There have been slowdowns in consumption and in business spending, but neither have contracted,” he says, pointing out that new jobs and corporate profits continue to trend upward. “It’s hard to call it a major economic contraction.”
Still, on the ground, many aspects of the current economy feel distinctly recession-like. Thanks to sky-high inflation, 71% of Americans say their income is failing to keep up with expenses, according to a recent survey from Allianz Life. Shoppers are encountering widespread product shortages while retailers, such as Walmart, are anticipating shrinking profits due to belt-tightening among consumers.
Preparing for recession: ‘You shouldn’t be bracing for anything’
If you’re frightened by the thought of a recession, it’s worth taking a step back and considering what you’re actually afraid of, McMillan says. “Are you expecting trouble for you personally, or for the economy as a whole? If you’re not worried about yourself, maybe you don’t need to worry that much.”
It still makes sense to take some precautions, however. While the job market is currently strong, a further economic decline “could mean that jobs become more perilous — and you could be on the wrong side of that,” says Paulsen.
Your first line of defense: an emergency fund, which financial experts say should ideally cover three to six months’ worth of living expenses.
“You should be mindful of your debt situation as well,” says Paulsen. Consider reducing your credit card expenditures and focus on paying down any high interest rate debt you may have, which could balloon if you fall on difficult financial times.
When it comes to your portfolio, “don’t go outside of the bounds of the plan you already have in place,” says Paulsen.
If negative numbers on your brokerage page are keeping you tossing and turning at night, it may make sense to take less risk in your portfolio, say, by reducing your allocation to stocks. But if you’re investing for a long-term goal, such as retirement, now’s a great time to continue to consistently invest in the market. Given the broad stock market’s long-term upward trajectory, short-term pullbacks in stock prices have historically represented opportunities to buy stocks when they’re effectively on sale.
None of these moves should represent drastic overhauls to your finances. Think of them like weatherizing your house — not ducking for cover from an incoming tornado.
“You shouldn’t be bracing for anything,” says McMillan. “Most of the time, unless you lose your job, you’re not going to notice a recession. It won’t affect your personal situation.”
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