The hyperinflation of the early 1980s provided a blueprint for the Fed’s action today. To cool an overheated economy, the Fed raises interest rates and tightens the money supply. That causes economic contraction, which finally breaks the back of inflation at the cost of a recession.
That’s how it went back then, and today’s Fed is on precisely the same path toward what many consider to be an inevitable economic downturn.
Forbes predicts the storm will arrive at the end of 2023 or the beginning of 2024. Its logic is that history shows a one-year time lag between changes in monetary policy and the real-world economic impact of those changes.
Others predict the recession will arrive earlier, around mid-year — but one way or the other, there’s a solid consensus that 2023 will bring economic turmoil.
The word “recession” conjures images of 2008, when foreclosure signs stood like tombstones on every front lawn on the block in the hardest-hit neighborhoods. But a 2023 downturn will likely play out much differently — and surviving it will require different plans and preparations.
Unlike in 2008, Current Housing Market Fundamentals Are Healthy
In the run-up to the Great Recession, banks readily extended cheap and easy credit to underqualified borrowers to finance risky and irresponsible subprime mortgages under the laxest of oversight. The result was a housing bubble that left banks and investors holding trillions of dollars in worthless mortgages and mortgage-backed securities when the bubble burst.
In 2021, inflation pushed the housing market to record highs — but it wasn’t a bubble. Supply chain problems, inventory shortages, a lumber crisis, the COVID shutdowns, record-low interest rates and the rise of remote work all stoked inflationary pressures — but none of those pressures indicate widespread rot like the kind that underpinned the housing market just before the Great Recession.
“It’s not like 2008, because the growth we have seen in the past few years wasn’t based on ARM mortgages being given to people who couldn’t afford them,” said real estate professional Tomas Satas, founder and CEO of Windy City HomeBuyer. “We will still see people upside-down in their mortgages and some foreclosures, but it will be a fraction of what we experienced back then. We’ve already seen the beginning of this market correction, and we know that properties are going to continue to lose value. However, this is more correction than recession.”
If It’s a Correction and Not a Crash, There Are Wins To Be Had
The events of 2008 were too fast and tumultuous to bet on; but, according to CNN, Moody’s and Goldman Sachs predict that 2023 won’t see a thunderous crash like the one that sunk the global economy in 2008. Instead, they’re planning for a creeping “slowcession,” or even a soft landing that smothers inflation without stifling growth.
In either case, those more moderate scenarios provide opportunities to make money.
Satas said many of his colleagues are shorting real estate-centered stocks right now in anticipation of a downturn that’s already started. But short-selling REITs and real estate ETFs is just one strategy for success.
“My personal plan to capitalize on the recession is to wait until we see the bottom of it and purchase some properties,” Satas said. “It’s heartbreaking that people sometimes lose their homes, but it’s better to help them out of an upside-down mortgage that helps a business than to leave them stranded.”
A Recession Will Stop the Unstoppable Job Market
During the Great Recession, unemployment peaked at 10% in 2009.
The December 2022 jobs report showed that the seemingly invincible employment market continues to power through despite inflation, bear stocks and a cooling housing market. But, if there is a recession, unemployment will surely rise.
Whether it will hit double digits again is pure speculation, but there are steps you can take now to insulate yourself from the risk of job loss later in the year.
“If you’re worried about job security during a recession, it can be a good idea to focus on building your skills and experience,” said Fluent in Finance founder Andrew Lokenauth, an investing and banking professional who held senior positions at Goldman Sachs, AIG and other major institutions. “This can make you more valuable to your current employer or make you more attractive to potential employers in the future. Additionally, consider networking and building relationships within your industry, as these connections can be valuable sources of support and opportunities during challenging economic times.”
Keep Your Job If You Can — and Maybe Start Planning for Another
According to Fortune, you’d also be wise not to change jobs right now if it can be helped. If the recession comes early, you could be stuck looking for work during a contracting job market. Even if you get a job before a downturn strikes, you’ll be the low person on the totem pole at your new job and most vulnerable to layoffs.
The good news is that people today are much better prepared to weather a difficult job market than they were in 2008. Side hustle culture was in its infancy then, but today the gig economy is a force of nature. By building a side hustle now — or at least planning for one — you’ll have at least some stop-gap income to rely on in case of a job loss a few months out so you’re not stuck relying only on your savings.
Good Financial Hygiene Is the Best Defense
One thing that’s consistent across all recessions is that it’s always better to be in tip-top shape heading into a storm.
“To recession-proof your finances, consider paying off expensive debt as quickly as possible,” said Andy Kalmon, CEO of employee stock purchase plan platform Benny. “Something that is also incredibly important to consider when heading into a recession is your credit score. An individual’s credit score is more important when entering a recession because a recession puts people in more situations where they must take on credit or debt. One of the key ways of maintaining a good credit score is consistently making payments. Do not stress yourself with paying off the full amount at once, but instead always have the money available to put towards monthly payments.”