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The recent banking industry crisis makes the economy more vulnerable to a recession, says one expert. Read on to see why you shouldn’t panic automatically, though.
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During the latter part of 2022, a near-term recession began to look likely. Inflation was surging. The Fed was aggressively raising interest rates. And many financial experts were convinced that higher borrowing costs were about to drive a major decline in consumer spending, resulting in a broad economic downturn.
But so far, that hasn’t happened. Inflation is still a problem, and the Fed has already raised interest rates twice this year. But consumer spending has not plummeted to a notable degree. Between that and a relatively low unemployment rate, the odds of a recession seem lower today than they did six or nine months ago.
As such, a number of financial experts have begun to scale back their recession warnings, including JPMorgan CEO Jamie Dimon. Dimon was quick to issue his share of doom and gloom warnings in 2022, but in recent months, his outlook seems to have shifted.
Still, in a recent shareholder letter, Dimon said that in light of the recent banking industry crisis, “The market’s odds of a recession have increased.” And that’s an unsettling thought. But here’s why you shouldn’t be so quick to panic over the idea of a recession.
A downturn is not guaranteed
Today’s economic situation is a strange one. Inflation remains high and the Fed still has plans to raise interest rates to encourage a pullback in consumer spending. That alone has the potential to drive the jobless rate upward and lead to a broad economic decline of some sort.
But a downturn also may not happen. Consumers have shown a resilience to inflation, as evidenced by the fact that they’ve continued to spend. And if that continues, we might manage to completely avoid a recession in 2023.
Furthermore, while the banking industry isn’t totally in the clear, we’re not in the same boat as in 2008. It’s unsettling that several major players in the banking industry — notably, Silicon Valley Bank and Credit Suisse — have experienced recent failures. And the impact of that might reverberate for months.
But there are still plenty of banks that are in good shape. And so consumers don’t necessarily have to lose sleep over the idea of losing their savings. (And besides, that’s what FDIC insurance is for.)
Consumers are better equipped to withstand a downturn
While the chance of a 2023 recession certainly isn’t 0%, Dimon acknowledged that U.S. consumers are in a reasonably good place to deal with one.
“Unemployment is extremely low, and wages are going up, particularly at the low end,” Dimon said. “We’ve had 10 years of home and stock price appreciation, and even if we go into a recession, consumers would enter it in far better shape than during the great financial crisis.”
Of course, this doesn’t mean consumers shouldn’t take basic steps to prepare for a recession. It’s a great time to work on building or boosting an emergency fund, paying off high-interest credit card debt, and growing job skills to gain some protection in the event of layoffs. But all told, consumers don’t have to dive into panic mode just yet — even with the odds of a recession perhaps being a bit higher at this point than they were a month or two ago.
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