Recession Coming? Why most Americans are not prepared

Posted on Saturday, June 15th, 2019 Chris Markoch

You don’t have to be a market doomsayer to acknowledge that a recession is coming. It may not arrive today. It may not arrive tomorrow. And if we’re really lucky, it may not even come in the next six months. But history is not on the side of the bulls, and that means that sometime soon the American economy will be in a recession. That being said, with the last recession over 10 years in our nation’s rearview mirror, history tells us that the only question Americans need to ask about the next recession is when will it arrive? But a better question may be, are we any more ready for the next recession than we were for the last one?

Recent history suggests we are not prepared

When the government shutdown occurred in early 2019, many Federal workers were unable to pay their mortgages and found themselves needing the assistance of food banks and other social services. Keep in mind, this was a shutdown that “only” caused these employees to miss one paycheck.

The takeaway is clear. Americans are still in a savings crisis. A recent survey conducted by the non-partisan Government Accountability Office (GAO) found that up to 50% of all households headed by Americans 55 and older had no retirement savings and up to 29% of those households had no savings at all, not even in a savings account. This supported a 2017 study that cited 25% of all U.S. adults had no retirement savings and 41% said they would not be able to cover a $400 emergency expense with the cash they have on hand.

But while some may say that Americans are complacent about savings, the real reasons may be far more complicated. For starters, while employment is up, wages remain stubbornly low. And while inflation rates remain low, the Federal Reserve reports that median household net worth remains below where it stood in 1998.

Then there’s the question of debt. For most American college students, loans are the only way to pay for a college education. Yes, it’s true that there is a movement that is showing more students delaying college or choosing a non-traditional degree path. However, the level of student debt remains crippling for many in the millennial generation who are finding that student loans are keeping them on the outside looking in both in the housing market and in terms of having the income needed to invest in the market. This means that many Americans who stood to benefit the most from this record bull market have been on the sidelines either by choice or by circumstance.

Credit Card Debt is still a major problem

However, on the other hand, it’s becoming clear that millennials are also not immune to the siren song of the credit card. Over 25% report that the debt they will have little hope of paying off comes from credit cards, not student loans. This is also true of Americans at large who continue to borrow. This is because, even as banks have tightened lending standards. Online lending institutions such as Lending Tree have become a source for many Americans to get the funds they need for home improvements, and yes … vacations. And speaking of home ownership, while subprime lenders have exited the scene, the Federal Government has stepped in through the Federal Housing Administration (FHA) mortgages. This means that for many Americans, their wealth is contingent upon one big asset that is in an extremely volatile market.

Even those that have the money to invest are not immune to a short memory when it comes to how to prepare for the next correction. Some financial advisors are expressing concern that the sustained bull market has caused many investors to have a fear of missing out that is higher than their concern about the market correcting.

Bottom Line 

It is impossible to predict exactly when an economy goes into a recession. In reality, recessions are only declared after a country’s economy has already entered into one. As an economic occurrence, a recession is a normal part of an economic cycle. There have been 47 confirmed recessions in American history. Many of these have been short-lived and the economy hardly skipped a beat. However, as Americans discovered in 2008, not all recessions are benign. The great recession of 2008 was catastrophic in the way it affected Americans of all income levels. The good news is that the pain of the Great Recession has caused many Americans to dramatically change their spending habits and expectations. However, if recent history is accurate, many Americans remain woefully unprepared for the next recession.

 

 

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