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The Coming Recession

College Planning Investing Retirement Funding Insights

There’s a recession coming. Here’s how to make sure your finances are prepared for it.

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Transcript Below:

Welcome back to 30 Minute Money, the podcast that delivers action-oriented smart money ideas in little bite size pieces recorded at ROC Vox recording and production in Rochester, New York, joining me, Certified Financial Planner. And all around, great guy Steve Wershing from Focused Wealth Advisors,

Speaker 3 (00:33):

The luxurious Roc Vox Studios,

Speaker 2 (00:35):

Or Luxurious.

Speaker 3 (00:36):

Let's, let's make sure we get that in there. Hi Scott. Nice to see

Speaker 2 (00:39):

You again. Nice to see you too, Steve. So a lot of folks are talking about recession.

Speaker 3 (00:44):

It's on everybody's lips.

Speaker 2 (00:45):

It's on, everybody's

Speaker 3 (00:46):

Talking about recession. So

Speaker 2 (00:48):

What can we do? Yeah. To prepare for

Speaker 3 (00:51):

That? Well, let's back up a minute first and just talk a little bit about what it is and that kind of stuff, cuz there's some confusion around that. You know, what you can do is pretty straightforward and we'll talk about that. But first, let's talk about what a recession is. Mm-hmm.  and why it's a boogeyman for so many, so many different people. So, um, uh, a recession, the, the, and, and there's some confusion around it now because the sort of shorthand for recession is, Oh, we've got two down quarters. We've got two quarters where the gross domestic product went down. Um, and a lot of people a few months ago were saying, Well, we've had two down quarters, why isn't it a recession yet? And, and, and it's because in reality, the recession, what a recession is, is a little bit more nuanced than that.


And there's a little bit more, you know, there's a little bit more mystery around it. So the, uh, the National Bureau of Economic Research is the government organization that actually declares recessions, and it's not quite so easy as two down quarters. So they define it as a significant decline, an economic activity that's spread across the economy, and that lasts more than a few months. So it's a little squishy. It's a little vague, and that's why it caused confusion, because people thought, Okay, two down quarters is not quite that simple. But, and, and it's, and it's confusing because everybody thought, Oh, well, we're in a recession, so we're ready to come out of a recession. But in, in reality, if you look at many of the economic statistics over the course of the past six months, we have not been in a recession.

Speaker 2 (02:20):

That's what I was gonna say. Exactly. I I've seen reports about, uh, unemployment down and there's a lot more jobs and, and all that kind of stuff. So

Speaker 3 (02:28):

That's right. Corporate earnings are up, you know, when people, when so many people are working and when there's so much profit being made in corporations, that's not a recession. You know, we might have inflation and that might hurt when you go to the grocery store. But, um, and I, and I think it's important to point that out because, you know, when you really do have a recession, when you've got more than just a few months of widespread decreased economic activity, it's, it, it, it feels bad. It, it's a, it's a maise, you know, it, it, it, um, and so, you know, it's understanding when, when a recession is actually happening can be useful, because you might have thought we had a recession and that was no big deal, but we didn't have one. Right. And so you're, it's, it's probably not gonna be, not gonna be as comfortable when we do.


Um, we care about when a, when we're really in a recession because it has a number of effects that could affect you directly and could affect your financial plan. First is in a recession, typically unemployment goes up or is up. So the job market is not as good in a recession. That's one of the reasons that people feel bad when we're in a recession, is because some of their friends are not working, or maybe they lost a job and, you know, we've got three and a half, 4% unemployment, that's not a recession. When we have one, it will be higher, and chances are we will not be as optimistic about it. We will not be as sunny about it. Now, another thing that gets people feeling down is the stock market, because as, as we build up to a recession, it's typically gone down a bit.


That part we've got already. Right. So that part this year has not been good for the stock market, but that's just one of the many pieces. So that one, that piece is in place for recession. But, um, many, you know, keep in mind that, um, stock market declines are not, don't happen at the same time as recession. Typically, the stock market is a leading indicator. So when the market goes down, that's one thing that could suggest that we are headed for recession. We've got lots of things that suggest it. Now, the stock market's one of 'em, but the stock market going down is one of those things. Um, we care about when, uh, our recession is actually coming because, um, it can be triggered by the government trying to fight inflation. And inflation has been a big deal, Right. That, that, uh, the, the numbers that came out last week are that, uh, inflation was running at an annualized 8.2% in September. It was 9% as recently as June. Um, but Scott, you and I are sitting here on Halloween, so I thought it relevant to mention inflation in candy Yeah. Is about the highest of all the grocery items. Candy inflation in ca in suites is up 13.1%.

Speaker 2 (05:22):

We actually aren't taking part in Halloween this year for the first time in a couple years.

Speaker 3 (05:27):

Oh, and

Speaker 2 (05:27):

Candy was the, the, the price of candy was a small part of it. Um, but in our neighborhood you can't, they're not going door to door again like they did because of the, the pandemic. Okay. They're doing like put a table out now kind of thing. Oh, okay.

Speaker 3 (05:40):

And so, okay.

Speaker 2 (05:41):

Yeah, so we're not, we're not doing that Sugar beets,

Speaker 3 (05:44):

It's, it's, again, it's, and, and you know, inflation usually, well, inflation occurs because there's too much money chasing too few goods. In some cases it's because there's just too much money. So a lot of the inflation that we're suffering now is because the government pumped so much money into the economy during the pandemic that all of a sudden you've got this three or $4 trillion in the economy. And of course supply hasn't changed. Right. In fact, we had some constraints on supply. Yeah. But when you have that much more money chasing essentially the same amount or fewer goods that causes inflation. But as you just pointed out, um, that's, that's not the reason for candy's inflation. Candy's inflation is due in large part because of the drought and how it affected sugar beets. So there's your trivia tip of the day

Speaker 2 (06:31):

That's, I didn't realize how how much sugar beets actually contributed to our sugar supply. Yeah. I always thought it was just sugar cane just

Speaker 3 (06:39):

Cane now. Right. Sure.

Speaker 2 (06:40):

Interesting. Learn something every day here, 30 minute,

Speaker 3 (06:43):

You never know what you're gonna learn on 30 minute money . Um, so, um, you know, in, in a recession things will continue to get less stable but continue to be more expensive. And so all of that, you know, will, as the econ economic activity starts to decline, and we'll still have that inflation, uh, because the lag on that, We'll talk about this in a little bit. Um, you know, it, it's, it is gonna be a situation where we still have inflation, but we just feel worse and un unemployment will be going up and the stock market will still probably be going down. And so when we get there, you know, it's gonna, it's not gonna feel good. And that's, that's why we wanna know about that is because we don't want people's bad feeling to affect their financial plan too much. It's part of the cycle. We need to be able to be, we need to be flexible and coping with it. But it's important to know when it's coming because it's not here yet. And we'll probably feel a little bit worse when it does come.

Speaker 4 (07:40):


Speaker 2 (07:41):

So are we in hack it? So are we in fact headed for a recession?

Speaker 3 (07:48):

In fact, we are. Uh, sure there's, it's, it's, it's very difficult to imagine a situation where we will not go into some kind of a recession for a few reasons. One is we talked about inflation and one of the, the federal reserve's main jobs is to fight inflation. And when you fight inflation, you depress economic activity. That's just, that's one. It it's, it's a monetary policy thing, but the effect of it is to decrease economic activity. And when then that's one of those hallmarks of, uh, of, uh, recession. So since the Fed has so much work to do in terms of battling that inflation, you know, if we compare this to historic periods in the past, whenever they've had to do the kind of job they have to do now, every time it's resulted in a recession, it's difficult to imagine it wouldn't result in one this time.


One of the other challenges they have is the lag time. So when the Fed tries to do something about inflation, you feel like, well, they're gonna do something and then we're gonna have, we're gonna see some results. This is not how it works. There's a really long lag time for a lot of these things. In fact, the effect on the economy has a long lag time too. Relatively recent studies have shown us that the peak impact of inflation on the economy may not show up for between two and four years. Wow. So the Fed might have been battling inflation since to near the beginning of the year, but the effect on the economy of inflation, we may not see that for another year. So, um, that's one of the cha. So, you know, everybody's feeling bad about the Fed trying to battle inflation, and they're gonna battle it, even if it increases unemployment. And at some point it probably will, and there's gonna be that time when they're really fighting inflation hard, causing higher unemployment. But we've still got inflation. So, you know, it's, it's tough. It's, it's a hard thing because that lead time is, is so long before you actually see the effects of it and the economy.


Um, now they have to clamp down on it because as we were talking about when we were talking about sugar beets, it's too much money facing, uh, chasing too few goods that that's what causes inflation. And that's because the money supply is so much bigger than, um, than it was before. So when they pump those trillions of dollars into the economy, that's ultimately what really triggered this inflation. Um, the, uh, the challenge that we have is that as the fed fights, that as I said, almost universally causes a recession. And what we're seeing is that the, in the increase in the money supply during the pandemic was significant and they've been able to really decrease the growth of the, of the money supply. So, um, right now the increase in the money supply is ticking along at about 2.6%. So that's, that's okay. That's, that's much better than it was before. But if you subtract inflation from that, it means that, um, we have a net minus 6% in the money supply. So the mon the money supply after inflation has shrunk about 6%. That lines up perfectly with the setup of fu of past recessions. So do I think a recession is coming? Yeah, because that, that the way they're fighting the inflation and the, the, uh, growth and the money supply after you factor that inflation in, Right. In line with, with prior recessions. So the pattern is shaping up just like it has in the past. And

Speaker 2 (11:30):

How long do recessions usually last?

Speaker 3 (11:33):

You know, it's, I can, I can tell you the long term and I will tell you the long term in a minute, but I, I just wonder if, if things are, if things are, are changing, because it used to be that, you know, we'd have an expansion for a certain number of years and then we would have a recession. And typically the, the, the expansion would go on for four or five, six years and then we'd have an 18 month recession. Recessions tend to be a lot shorter and a lot more dramatic than, um, than the growth. I, I'm, I'm still keeping my fingers crossed that it, that it will be relatively brief. Again, it's only 8% of the time in our economic history are we in recession. So it'll, with any look, it won't last all that long. You know, it might be a year, year and a half. I don't really know. I'm not a good predictor of that stuff, but it's a lot shorter than the growth, the growth periods.

Speaker 2 (12:24):

And I'm sure that you're going to tell us what we can do in order to prepare for this.

Speaker 3 (12:30):

I can, we have one or two more. One, one other thing I wanna mention because Okay. You know, we taught, we you got your trivia fact in this episode with the sugar beet and the drought, and we're gonna give you your cocktail party tip. Um, the other thing that's setting us up for inflation is what interest rates are doing. And, um, we're gonna refer to something called the yield curve. Um, the yield curve is a graph of government of the interest that government bonds pay based on the, uh, on the, on the length of the term of the bond. So if I was gonna borrow some money for you, Fitz, I'm a little short this month, you know, I'm hoping that you'll give me a little bit of a loan and I'll pay you back in six months, you're gonna charge me some kind of an interest rate.


Right? If I said, Hey Fitz, um, I need to borrow some money cuz they need to do something, it's gonna take a while for me to earn the money back. So I'll give you the money back in five years. , you're probably gonna wanna charge me more. Yeah. Cuz I'm tying up your money for more. So typically the yield curve slopes up. So if you get a, uh, a one year treasury or a two year treasury, it typically pays less than a five year or a 10 year or a 20 year treasury. But right now, short term treasuries are paying more than long term treasuries. So we say this is, so next time you go to a cocktail party, just say yield curve inversion, we have an inverted yield curve and pretty reliably when we have an inverted yield curve, that's another one of those, um, signs that a recession is on the way.


So let's talk about what you can do about it. Um, that was a great big long setup for, you know, what's a recession? Why do we care? Do we think one is coming now we'll get to the part, you know, the part that people can actually use. Yeah. What can you do about it? So the first thing you wanna do is, is take a look at your balance sheet, which is all your assets and liabilities mm-hmm. . And if you've got short term debts like credit cards and that kinda stuff, take a look and see what you can do to clean 'em up. Because when a recession comes, there may be some constraints put on your cash flow, and if you can get rid of some of those payments you'll want to. But also a lot of those things, um, can float, the interest rate can float and so they're getting more expensive.


So if you can clean off some of that debt off of your balance sheet, that's a good, that's a good way to get prepared for recession. You'll have less money going out the door every month. You'll have a, a little bit more of a safety buffer. So first thing is to clean up some debt. Second thing is build your emergency fund. Um, everyone should have an emergency fund. Um, the guideline for how much you should have depends on a lot of things about your particular financial situation. But if you say two to six months of expenses and a cash account that you can readily access, that's a good level to have as an emergency fund. But as we head into a recession, make sure that you've got that put away. Make sure that it's all set up and you might even want to increase the size of it just a little bit in case anything bad happens, you wanna make sure that you've got some money that you can use to do that and not necessarily have to dip into debt to be able to cover those unexpected expenses.


Um, you wanna take a look at your cash flow, Um, take a look at how much money comes in every month and how much goes out every month. And, um, and reflect on the decisions that, that you make in terms of that money going out. I'm not saying that you should cut back on your spending, but what I am saying, and one of the things that we work with all of our clients on is just getting comfortable knowing where all the money goes every month. Um, because that enables you to make choices. If you don't know where the money's going, you can't really make informed choices. You can say, Well I think we'll spend less money on groceries or on gas this month, but if you don't know it's hit or miss and, and often that that doesn't work. But if you really know about how much money is going out to each of those categories every month, then you can make decisions if you need to.


And so take a look at that cash flow and get reoriented to it because if something does turn down, if, if you do have some kind of a setback in your own household, it's useful to know upfront, Well you know what, we know that we spend about this much eating out every month we spend about this much going to movies or shows. Well, you know, we might just choose not to do that for a little while, or we might choose to scale that back just a little bit until we get through this. Mm-hmm.  knowing your cash flow is what enables you to do that. You can't make informed decisions without the data, so get the data.

Speaker 2 (16:54):

Yeah. I'll tell you that that is probably one of the biggest challenges that I've had in my family with, uh, three, three teenagers, you know, is, is exactly, is knowing where that money's going.

Speaker 3 (17:05):

Exactly. It's going right down their throats. It's . I was a teenage boy once I remember that.

Speaker 2 (17:10):

Oh, so true. Oh, so

Speaker 3 (17:12):

True. I would go from eating everything in the refrigerator to eating the utensil, so I  I get that. Right. Exactly. So you just wanna know where it goes. So keep track of it, keep keep track of it and categorize the things as they're, as they're going by. And then the final thing is not a cash flow thing. The final thing is a job thing. So one of the, right now, um, it's a really tight job market. If you're out looking, this is a great time to be looking for a job because there are so many places that are really looking for employees and, and having a difficult time. But when we get into a recession, um, unemployment will go up and I'm hoping that it's not you, but if you are, if if, if you or your spouse is affected by this, um, you wanna make sure you do everything you can to bounce back from that. So the other thing that I would suggest doing is keep your networking current. Keep in touch with other people in your industry. Make sure that everybody knows your name and you know what's going on and the industry and other companies and that kind of stuff. So if you needed to, you would have people to call if you needed to find a new career situation. So that's just a real easy no cost thing that you can do just to increase the, your job security, even if it's not at your current employer.

Speaker 2 (18:22):

And considering I am my own employer that, uh,  the talk of recession is, is scary. Sure. For, for those us who own our own businesses, it's Yep.

Speaker 3 (18:32):


Speaker 2 (18:32):

Thankfully, I, you know, there, my wife's in healthcare, so there's always gonna be healthcare. We're

Speaker 3 (18:38):

Gonna Yeah, that's, that's, that's right. That, that's, um, that there's, we refer to that as inel elasticity of demand. So exactly

Speaker 2 (18:46):

What he said, there's

Speaker 3 (18:46):

Exactly right .

Speaker 2 (18:49):

So coming up, we're gonna talk about Steve's 30 minute action list. We'll be right back.

Speaker 5 (18:56):

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Speaker 2 (20:22):

And we're back of the 30 Minute Money podcast. We're talking about what to do with the upcoming, possibly the upcoming recession. And Steve, you have your 30 minute action list.

Speaker 3 (20:32):

Yep. 30 minute action list. Um, identify what debts you have and which ones are most expensive so that you can work on them first and decide which spending categories you can be flexible on. So know your cash flow and know if something happened that affected your income. You would know, uh, already you would not have to decide, um, which kinds of things you would decide to spend less on.

Speaker 2 (20:58):

And I know I'm gonna stop buying all those whatchamacallit bars that I buy every, you know, sugar beets. Sugar beets too, too much sugar bets.

Speaker 3 (21:06):

It's on this. This is the sugar beet episode. This is all about sugar beets, .

Speaker 2 (21:09):

Well that's it for today. 30 minute Money, you can find it at 30Minute.Money. And of course, the podcast is wherever you get your podcast. We will be back next time. Thanks for joining us.

Speaker 1 (21:23):

Thanks for listening. If you like this show, leave us a review on Apple Podcast or like the Stephen Wershing CFP Facebook page. And feel free to leave us a suggestion for what topics you would like to hear discussed on the show. Securities offered through registered representatives of Cambridge Investment Research Incorporated, a broker dealer member FINRA, S I P c. Advisory services offered through Cambridge Investment Research Advisors Incorporated a registered investment advisor. Focus Wealth Advisors and Cambridge are separate entities. Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.