The average American may not be very familiar with some of the bigger economic indicators that tell us whether the economy is heading into a recession. We rely on financial and economic experts to do the work. One such expert, Jaspreet Singh, an entrepreneur and founder of Minority Mindset, who runs a YouTube channel on financial education, recently wrote, “America is about to get a reality check.” He explains some key economic signs Americans want to watch out for and emphasizes the importance of maintaining healthy finances next year. Following Mr. Singh’s warning may save Americans from economic hardship in the future.
Mr. Singh pays regular attention to financial indicators wherever he goes. Recently, he encountered facilities in his two largest cities in America, Manhattan and Detroit, that were struggling to find enough labor to run their operations efficiently. One was his deli and convenience store and the other was his Burlington Coat Factory retail store. The coat factory was short-staffed and closed on weekends, even though there were paying customers. Labor shortages can be a sign of impending economic problems. However, what Singh really wanted to focus on was the relationship between Americans’ spending habits and inflation.
The American economy continues to have an inflation problem, according to economic indicators and the Federal Reserve. Inflation has eased slightly from recent peaks, but not enough to reduce consumer spending. And why should Americans stop spending if it keeps the economy moving? Because, unfortunately, large expenditures cause inflation. As a result, the Federal Reserve has raised interest rates to curb spending as a way to control inflation. This is a vicious cycle that is difficult to break, but it is necessary to avoid inflation making our goods and services too expensive to buy. However, spending is not limited to cash only. People can also spend through borrowing from credit cards, home equity lines of credit, and even retirement accounts. As long as people can spend in all these ways, the economy will remain strong and so will inflation.
Although things look good at the moment, it is a false lull, Singh warned, and there will be changes in the economy as a result of these higher interest rates. These interest rates are some of the highest since 1981, the last time the Federal Reserve raised rates this aggressively. Rising interest rates have made it more difficult to borrow money, not only for individuals making purchases such as mortgages and car loans, but also for businesses looking to invest in new infrastructure and services and governments needing to repay their debts. It will be expensive. Higher interest rates mean everyone is paying more money. Additionally, history shows that 11 of the last 14 rate hike cycles in modern economies have ended in recession. Singh suggested this interest rate cycle is likely to be a one-shot, although it does not guarantee a recession. After the Fed raised interest rates as aggressively as they do now in 1981, the United States suffered a recession in 1982 and the unemployment rate reached a high of 10.8%.
So higher interest rates are likely to impact the economy, but when will that happen? According to economists, Singh said people said they will have exhausted their cash reserves, savings and 401(k) withdrawals by the end of 2023. But people will continue to spend through credit cards, home equity lines of credit and other loans until about the second quarter. The country is likely to feel signs of recession between April and June 2024.
So what does this mean for the average American? While it’s difficult to say exactly how the recession will affect specific individuals and families, with one common symptom being high unemployment rates, Singh said Americans are encouraged to educate themselves now about saving, investing money, and being careful about spending in preparation for a recession. He explained that this is not the year to make big purchases, but rather the year to be financially smart. “It’s important to understand what’s going on and build your financial education and preparedness. Now is the time to be prepared so you don’t become one of those panicking and suffering,” he said.