Inflation Interest Rates And Jobs: How Today s Economy Compares To Recessions Of The Past
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What's happening
There's still debate about whether the US economy is officially headed into a recession, but the economic downturn is causing widespread stress.
Why it matters
Periods of financial volatility and market decline can drive people to panic and make costly mistakes with their money.
What's next
Examining what's happening now -- and comparing it with the past -- can help investors and consumers decide what to do next.
Facing the aftershocks of a rough economy in the first half of 2022, with , rising , soaring and a , leading indicators of a have moderated slightly in the past month. That could mean the economic downturn won't be as long or brutal as expected.
Still, the majority of Americans are and anxiety over jobs. The country has experienced two consecutive quarters of economic slowdown -- the barometer for measuring a recession -- even though the National Bureau of Economic Research hasn't made the "official" recession call.
At a time like this, we should consider what happens in a recession, look at the data to determine whether we're in one and try to maintain some historical perspective. It's also worth pointing out that down periods are temporary and that, over time, both the stock market and the US economy bounce back.
I don't mean to minimize the gravity and hardship of the times. But it can be useful to review how the economy has behaved in the past to avoid irrational or impulsive money moves. For this, we can largely blame recency bias, our inclination to view our latest experiences as the most valid. It's what led many to flee the stock market in 2008 when the , thereby locking in losses and missing out on the subsequent bull market.
"It's our human tendency to project the immediate past into the future indefinitely," said Daniel Crosby, chief behavioral officer at Orion Advisor Solutions and author of . "It's a time-saving shortcut that works most of the time in most contexts but can be woefully misapplied in markets that tend to be cyclical," Crosby told me via email.
Before you make a knee-jerk reaction to your portfolio, give up on a or lose it over job insecurity, consider these chart-based analyses from the last three decades. We hope this data-driven overview will offer a broader context and some impetus for making the most of your money today.
What do we know about inflation? Historical rate by year
Macrotrends.net
Current conditions: The US is experiencing the in decades, driven by global supply chain disruptions, the injection of federal stimulus dollars and a surge in consumer spending. In real dollars, the over the past year is adding about $400 more per month to household budgets.
The context: Policymakers consider 2% per year to be a "normal" inflation target. The country's still experiencing over four times that figure. The 9.1% annual rate in July was the largest jump in inflation since 1980 when the inflation rate hit 13.5% following the prior decade's oil crisis and high government spending on defense, social services, health care, education and pensions. Back then, the Federal Reserve increased rates to stabilize prices and, by the mid-1980s, inflation .
The upside: As overall inflation rates rise, the silver lining might be increased rates of return on personal savings. are starting to offer , while -- federally backed accounts that more or less track inflation -- are attracting savers, too.
What's happening with mortgage rates? fixed-rate mortgage averages in the US
Current conditions: As the Federal Reserve continues its to cool spending and try to tame inflation, the rate on a has grown significantly. In June, the average rate jumped annually by nearly 3 percentage points to almost 6%. In real dollars, that means that after a 20% down payment on a new home (let's use the average sale price of ), a buyer would roughly need an extra $7,300 a year to afford the mortgage. Since then, rates have cooled a bit, even dipping back down below 5%. What happens next with rates depends on where inflation goes from here.
The context: Three years ago, homebuyers faced similar borrowing costs and, at the time, rates were characterized as "historically low." And if we think borrowing money is expensive today, let's not forget the early 1980s when the Federal Reserve jacked up rates to never-before-seen levels due to hyperinflation. The average rate on a in 1981 topped 16%.
The upside: For homebuyers, a potential benefit to rising rates is downward pressure on home prices, which could cause the housing market to cool slightly. As the cost to borrow with mortgages becoming more expensive, homes could experience and prices would slow in pace. In fact, nearly one in five sellers dropped their asking price during late April through late May, according to .
On the flip side, less homebuyers mean more renters. , and housing activists are on what they call a "national emergency."
What about the stock market?
Dow Jones Industrial Average stock market index for the past 30 years
Macrotrends.net
Current conditions: Year-to-date, the -- a composite of 30 of the most well-known US stocks such as Apple, Microsoft and Coca-Cola -- is about 8.5% below where it started in January. Relative to the broader market, technology stocks are down much more. The Nasdaq is off almost 19% since the start of the year.
The benchmark S&P 500 stock index hit lows in June that marked a more than 20% drop from January, which brought us officially into a . Since then, it's bounced back up a little, but some experts warn that a current is at odds with expected earnings and we could see even lower stock prices in the near future.
The context: Stock price losses in 2022 are not nearly as swift and steep as what we saw in March 2020, when panic over the pandemic drove the in roughly four trading days. The market reversed course the following month and began a bull run lasting more than two years, as the lockdown drove massive consumption of products and services tied to software, health care, food and natural gas.
Prior to that, in 2008 and 2009, a deep and pervasive crisis in housing and financial services sank the Dow by nearly 55% from its 2007 high. But by fall 2009, it was off to one of its longest winning streaks in financial history.
The upside: Given the cyclical nature of the stock market, now is not the time to jump ship.* "Times that are down, you at least want to hold and/or think about buying," said Adam Seessel, author of . "Over the last 100 years, American stocks have been the surest way to grow wealthy slowly over time," he told me during a .
*One caveat: If you're closer to or living in retirement and your portfolio has taken a sizable hit, it may be worth talking to a professional and reviewing your selection of funds to ensure that you're not taking on too much risk. Target-date funds, a popular investment vehicle in many retirement accounts that auto-adjust for risk as you age, may be for pre- or early retirees.
What does unemployment tell us?
US unemployment rates
Current conditions: The shows the unemployment rate holding steady, slightly dropping to 3.5%. The Great Resignation of 2021, where millions of workers quit their jobs over burnout, as well as unsatisfactory wages and benefits, left employers scrambling to fill positions. However, that could be changing as economic challenges deepen: are likely on the horizon, and an increasing number of workers are concerned with job security.
The context: The rebound in the unemployment rate is an economic hallmark of the past two years. But the ongoing interest rate hike may weigh on corporate profits, leading to more layoffs and hiring freezes. For context, during the Great Recession, in a two-year span from late 2007 to 2009, the unemployment rate rose sharply from about 5% to 10%.
Today, the tech sector is one to watch. After benefiting from rapid growth led by consumer demand in the pandemic, companies like Google and Facebook may be in for a "correction." , a website that tracks downsizing at tech startups, logged close to 37,000 layoffs in Q2, more than triple from the same period last year.
The upside: If you're worried about losing your job because your employer may be more vulnerable in a recession, document your wins so that when review season arrives, you're ready to walk your manager through your top-performing moments. Offer strategies for how to weather a potential slowdown. All the while, review your reserves to see how far you can stretch savings in case you're out of work. Keep in mind that in the previous recession, it took an average of eight to nine months for unemployed Americans to secure new jobs.
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