“As we head into 2024, the talk of a recession is a real possibility we need to watch out for,” warned True Tamplin, a certified educator in personal finance and founder of FinanceStrategists.com — a financial education platform that helped over 7 million people in 2023. According to Tamplin, economists and financial experts often look at a mix of indicators to predict economic downturns. Some of the big ones include:
- If fewer jobs are being created, or worse, if layoffs start to increase. “A healthy job market means people are working and spending, which keeps the economy humming. Increasing layoffs, on the other hand, would be a major red flag,” Tamplin said. So far this year, the labor market has already faced a significant shake-off. According to layoffs.fyi, nearly 35,000 jobs have been lost across more than 140 companies as of February 2024. Besides layoffs, job openings, as reported by the Bureau of Labor Statistics, also fell from a high of 12 million in March 2022 to 8.8 million in November 2023.
- When the cost of living rises faster than people’s earnings. “When this happens, households have less to spend. Persistent high inflation along with stagnant wages can quickly choke economic growth,” Tamplin said. According to Bank of America’s new findings from its 13th annual Workplace Benefits Report, “The Transforming Workplace,” nearly 7 in 10 Americans feel that the cost of living is outpacing their salaries.
- Lower consumer confidence. “Consumer confidence measures how optimistic or pessimistic people feel about their financial future. If confidence drops, people spend less, affecting overall economic activity,” Tamplin said. U.S. consumer confidence doesn’t seem to be lowering though. Instead, the Conference Board Consumer Confidence Index rose in January to 114.8, up from a revised 108 in December. Dana Peterson, chief economist at The Conference Board, believes January’s increase in consumer confidence likely reflected slower inflation and anticipation of lower interest rates.
- A negative yield curve. “When the interest rates on short-term securities are higher than long-term treasuries, it’s often seen as a predictor of a recession,” Tamplin said. Simply put, when investors are fearful, they tend to buy up longer-term 10-year treasuries, causing the yield to fall below the interest rate of shorter-term securities, resulting in a negative yield curve. According to the Federal Reserve Bank of New York, the yield curve is a valuable forecasting tool since it significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead. The yield curve is currently inverted as of February 2024.
Make Your Money Work for You
So, based on these key recession indicators, will a recession happen in 2024? While a yield curve inversion has had a strong record of predicting recessions, according to a December survey from the National Association for Business Economics, more than 75% of economists still said they believe the chances of a recession in the next 12 months is 50% or less.
How To Financially Prepare For a Potential Recession
Remember, finance experts and economists don’t have a crystal ball to predict with 100% certainty whether a recession will happen in 2024. So, to protect your wallet, consider the following steps to shore up your finances in anticipation of tougher economic times.
Beef Up Your Emergency Fund
“First things first, beef up your emergency fund,” Tamplin said.
He emphasized that while the usual advice is to have three to six months’ worth of living expenses saved, aiming for the higher end can give you more peace of mind, especially if a recession hits hard.
“This fund should be easily accessible, like in a savings account. The goal is availability, not necessarily growth,” he added.
Nevertheless, you may want to store your money in a high-yield savings account instead of a traditional one since you can often earn up to 10 times the interest.
While most financial experts recommend saving for a rainy day, not many Americans prioritize it. According to the Bureau of Economic Analysis, in June 2023, the national savings rate was 4.9%, meaning people saved that amount on average from their disposable incomes. By September, it had dropped to 3.4%.
Make Your Money Work for You
If you’re like many Americans who have little to no money left over each month to contribute to your emergency fund, take a good look at your monthly expenses and identify where you can cut back. Cancel subscriptions you don’t use much, cook at home instead of eating out, and adopt a more frugal lifestyle. Use a budgeting app like Mint or PocketGuard so you know where your money is going each month.
Pay Down Debt
High-interest debt can make socking away for the future difficult, as the interest compounds quickly. So, if you’re currently buried in multiple debts, focus on paying them down first before making any other money moves.
Here are two effective debt repayment strategies to consider: the debt snowball method and the debt avalanche method. With the first method, you pay off your debt in order of smallest balance to largest balance. With the second method, you pay off debt with the highest interest first. Generally, the debt snowball method is better if you’d like to quickly reduce the number of debt payments you make each month or need some extra motivation. The debt avalanche method might be preferable if your goal is to save on interest payments.
You can also consider transferring the balances to a lower-interest card or taking out a debt consolidation loan to make debt repayment more manageable.
Explore Side Gigs That Fit Your Skill Set
Additional income streams could help buffer against job loss or reduced hours if a recession were to happen. So, if you have time outside of your 9-to-5 schedule, look into side gigs that fit your skill set, whether that’s freelance writing, graphic design, driving for ride-share companies or delivering food.
Plus, diversifying your income through side gigs not only provides financial security but also allows you to explore and expand your professional capabilities.
Consider That Some Industries May Be More Affected Than Others
Lastly, it’s important to be aware that some industries may feel the pinch more than others when the economy takes a downturn.
Make Your Money Work for You
“For example, luxury goods, travel, and construction often hit rough patches because people cut back on spending. On the flip side, essentials like healthcare, utilities, and consumer staples (think food, household products) tend to be more stable,” Tamplin said.
So, if you’re working in or invested in more vulnerable sectors, you might see more job insecurity or dips in investment values.
“It’s a good idea to keep this in mind when planning your career moves or managing your investments,” Tamplin added.
More From GOBankingRates
- 7 Best New Dollar Tree Items That Are Worth Every Penny
- You Can Get These 3 Debts Canceled Forever
- 8 Signs You'll Retire Wealthy
- 4 Reasons You Should Be Getting Your Paycheck Early, According to An Expert
