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While experts debate whether the United States is on the verge of an economic downturn, many Americans are already bracing themselves for a recession.
At that point, 66% of Americans fear a severe recession is just around the corner, compared to 48% who said the same a year ago, according to a poll by the Allianz Life Insurance Company of North America.
One of the main reasons is that people fear high inflation, which has pushed higher prices for goods and services.
The survey found that 82% fear that inflation will negatively impact their purchasing power over the next six months. Furthermore, the same percentage of respondents said they expect inflation to worsen over the next 12 months.
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Meanwhile, 71% said their salaries are not keeping up with rising expenses.
(Allianz Life conducted the online survey in June and surveyed just over 1,000 people.)
Data released last week by the US Department of Commerce only further fueled fears of a decline, with gross domestic product falling for the second consecutive quarter, a traditional sign of recession.
However, the White House was quick to dismiss speculation that a recession has already arrived, with President Joe Biden citing the low unemployment record among other factors.
Consumer spending rose 1.1% in June due to rising inflation, according to government data released last week.
However, with recession fears rising, this may already prompt Americans to change the way they manage their money.
Because a recession could be consumer driven
Even with the latest data, consumer spending has been pretty flat for the past seven months, according to Jonathan Pingle, UBS’s chief US economist.
At the beginning of the year, families were in good shape, with excess savings and solid earnings on the labor market. But then high gas prices and rising interest rates piled up.
“Overall, it just proved to be a much weaker trajectory for consumer spending than I think most people expected,” Pingle said. “Where we sit now is in a bit of a weak position for the economy.”
The big question that experts are debating now is whether the country is already in a recession or not.
UBS’s probability model currently has a 40% chance of a recession in the next 12 months. The first-quarter GDP slowdown had some “really noisy” components, which were the return of a strong fourth quarter in 2021, Pingle said, still making the reason for the quarter-to-quarter decline inconclusive.
A consumer-led recession is one way a US recession could manifest itself, according to a recent research report from UBS. Another scenario could be caused by the tightening of the Federal Reserve.
If consumer spending recedes, it could be a confidence shock, Pingle said. This could be prompted by households increasing precautionary savings as they worry about the future and put off purchases.
To be sure, increasing savings and reducing spending are the suggestions generally given to people who want to limit the impact of an economic downturn on their finances.
“Pay off your debt, increase your savings, and keep making those contributions on retirement savings through the ups and downs,” said Greg McBride, senior vice president and chief financial analyst at Bankrate.com.
“In the long run, when you look back you will be really happy to have invested in 2022,” he said.
As concerns about the recession vary from generation to generation
However, the recent Allianz Life survey found that 65% of investors say they are keeping more money out of the market than they should now due to fears of losses.
For baby boomers, the # 1 concern, cited by 73%, is that they won’t be able to afford the lifestyle they want in retirement due to rising costs. This was up from the 66% who cited that concern in the first quarter.
“Having this kind of downturn coupled with this kind of inflation for someone who has just retired can really drain your assets much faster than you expected,” said Kelly LaVigne, vice president of consumer information at Allianz Life.
For Generation X, the biggest concern is that income is not keeping up with rising costs, cited by 75% of respondents, up from 68% in the first quarter.
Meanwhile, fewer millennials have a financial plan in place to handle rising inflation. The survey found that 56% currently have such a plan, down from 61% in the first quarter.
For all individuals, developing a financial plan can help limit the effect of economic uncertainties, LaVigne said.
“Regardless of whether you think you have enough money or not, there is a financial advisor for you,” LaVigne said. “And it’s never too early and certainly never too late.
“Not having a plan is the worst thing you can do,” he added.