Are the Recent Recession Warnings Overblown?

There's been a lot of recession talk. How spot-on is it?

"Prepare for a long and painful downturn."

"Boost your savings now while you can."

These are some of the warnings financial experts have been sounding for months on end as recession fears take hold. It's reached the point where you almost can't even use the internet with the word "recession" smacking you in the face.

Making matters worse is the unsettling nature of that line of messaging. Nobody wants to hear that the economy is about to fall into a downward spiral. And nobody wants to have to lie awake at night worrying about falling victim to layoffs.

But are all of these recent recession warnings largely exaggerated? Or do Americans really have a reason to be worried?

A mismatch of facts

The Federal Reserve has been implementing aggressive interest rate hikes in an effort to slow the pace of inflation. In doing so, it's making it more expensive for consumers to borrow money in the form of credit cards, personal loans, and home equity loans or lines of credit.

The reason so many experts are convinced we're due for a recession is that the Fed's actions could easily cause a pullback in consumer spending. And that could lead to a period of broad economic decline.

But what makes those warnings harder to swallow -- and perhaps less believable -- is that the U.S. labor market is in a very strong place. In October, the national jobless rate was 3.7%, which is comparable to where unemployment sat prior to the pandemic. And a total of 261,000 nonfarm payroll jobs were added to the economy last month. That's hardly indicative that a downturn is right around the corner.

Be prepared but optimistic

At this point, it wouldn't be accurate to say that we're definitely in for a recession in 2023. But we can't discount that possibility, either. We don't know how extreme an effect the Fed's interest rate policies will have on the economy, and at this point, all we can really do is take a wait-and-see approach.

But given the potential for the economy to sour, it's a good idea to take steps to gear up for a recession. At the very least, that means making sure to have adequate funds on hand for a period of unemployment -- ideally, enough in savings to cover a minimum of three months of bills.

Shedding high-interest debt is another smart move for consumers right now. Not having additional financial obligations to contend with could make a period of joblessness easier to manage.

Those worried about job loss in the event of a recession might also want to line up a second income stream now, while the economy is still strong. There's plenty of opportunity to pick up gig work, and that could serve as a backup income source in the event of a layoff in 2023.

All told, it's hard to say whether recent recession warnings are spot-on or a big exaggeration. Preparing for conditions to worsen is really the best bet either way.