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Jeremy Owens: Hello and welcome to On Watch by MarketWatch. I’m Jeremy Owens. Today’s episode can be summed up in a single word, recession. I want to be clear, we are not currently in a recession, but it does feel that way to a lot of people. The July jobs report and the market jitters that followed made it abundantly clear that investors are harboring concerns about an economic downturn.
And yeah, the stock market has rebounded since then, but some recession warning signals are still flashing amber even as corporate earnings sustained the stock gains we’ve seen. So on today’s episode, the recession signs we should actually be worried about and how to prepare in case one hits. In recent weeks, signs of a recession have been popping up like billboards along the side of a highway.
The most recent jobs report triggered the Sahm rule, a reliable indicator based on the unemployment rate. Economists in California developed their own version of that rule, which says there’s a 40% chance we are in a recession right now. And then there is the Treasury yield curve, which inverted two years ago, a sign of recession on the way, and then disinverted recently, typically a sign that a recession has begun.
But on TikTok, Americans are seeing a very different sign of a recession. This. That’s Charli XCX’s hit song 365 off an album called Brat that has led to this summer being described as Brat Summer. The popularity of that song and others like it have led to a theory about a recession. Here’s MarketWatch reporter Hannah Erin Lang to explain.
Hannah Erin Lang: It’s based on this concept called recession pop. It’s basically this idea that pop music mirrors the economic moment that we’re in, so we get this upbeat, dancey pop music during a recession or during a period of economic struggle that is telling listeners, “Forget about your worries. Keep dancing. Keep partying.” Think of Lady Gaga’s first radio hit Just Dance. It’s the super dancey, super poppy song that came out in 2008 as Americans were losing their homes, losing their jobs in large numbers.
And the chorus of this song is repeatedly telling us, “Just dance. It’ll be okay.” I think Tik Tok by Kesha circa 2009 is another really great example. Down by Jay Sean, which literally has the lyric down like the economy. We were experiencing the most profound economic crisis since the Great Depression. And Lil Wayne said a lyric about being down like the economy.
And then if you look at today, the examples that people are pointing to about how this might be coming back, you get pop stars like Sabrina Carpenter, her song Espresso, or Charli XCX and her album Brat. It’s a lot of this fun maximalist pop music that people are pointing to today. They’re saying that sounds like the pop music from this Great Recession era and the economy doesn’t feel great to me right now, so maybe there’s a through line there.
Jeremy Owens: So Americans are seeing signs of recession everywhere they look, but economic data so far have not really supported those signals. Gross domestic product grew at a 2.8% rate in the second quarter, far from the two consecutive quarters of negative GDP that would meet the textbook definition of a recession.
And we’ve had a number of recession signal head fakes in recent years. So are we headed for a recession this time or is it just another false alarm? I called up our economics editor Greg Robb to ask him. Well, Greg, I’m just going to be very blunt with my first question, are we in a recession right now?
Greg Robb: No. What we are in is that situation at the beach when there’s a riptide and the lifeguards put up the red flags. So the red flags are up about a recession.
Jeremy Owens: Red flags at a beach, that’s actually a new analogy for you, Greg. What you’ve used mostly has been that the economy is a snowball that could turn into an avalanche. Where are we on that path?
Greg Robb: That’s right. The avalanche was the labor market. The labor market has been softening, the unemployment rate has been rising, and that’s the thing that tends to be the avalanche. We’ve seen in the past history that when the unemployment rate starts to go up, it keeps going up. And that is kind of the thing that people are worried about.
Jeremy Owens: I keep going back to back 2021-ish when there were all of these recession indicators being triggered. There was pretty much a universal view from economists that we were going to see a recession in ’22 and then we just never did, and the economy has flown on since then. What should people take from that?
Greg Robb: Well, I mean, our stance here at MarketWatch is we take that really seriously when we see the flags go up. The way the U.S. economy works is that people have to adjust their lives to the economy. So it’s important for us to take that all really seriously. There is a big debate going on now among economists. Some of the people are talking about the recession or talking about the labor market, and they also see signs in credit card debt.
There is a sense that interest rates are high and they’re hurting ordinary folks. Now, the other side of that debate is economists who think that the economy was overperforming, going a little bit too fast, and it’s great that the economy is going back down to the speed limit. It seems to me it’s a debate we’re talking about next year. We’re not talking about this year for a recession.
We’re talking about in the second quarter of next year, maybe the first quarter of next year. Economists usually have a gauge for the next six months of the economy. They can look at things and the way trends are going, but it’s over that hill that they can’t see and that’s what we’re talking about now.
Jeremy Owens: Greg, you’re saying that the visibility beyond six months is not that great, but that is precisely what people are going to want to hear from Jerome Powell when he speaks at Jackson Hole. You’ll be there. What do you expect to hear? What do you think we are going to get out of that and what is the most important thing you’re looking for from that speech?
Greg Robb: Powell is going to speak. He’s going to set the scene, set the table, make the argument for this next cycle that the Fed is in. The Fed is expected to cut rates in September, and it’s really important that he talks a little bit about where they’re going to go after that. Everybody’s focusing on this first one like it’s the biggest be all and end all, but it’s more like what’s going to happen after that?
The market has something like seven or eight cuts in a row priced in now. Traders expect the Fed to start cutting rates in September and then keep cutting at every meeting until maybe the middle of next year, so bringing rates down a lot. And that’s kind of almost like a recessionary signal. The Fed hasn’t given that signal. The Fed is talking about going once a quarter.
Jeremy Owens: And they haven’t signaled how much they’re going to cut at that once a quarter. I mean, if it’s just like a 25 basis points cut in September and they wait until ’25 maybe to do it again, how much will that really affect the economy?
Greg Robb: The interesting thing now about the Fed that people overlook is tons of their work is signaling. If they just say more rate cuts are coming, the market does most of the work for them. The market has already done the work for them. Rates are already down on expectations of the Fed moving. So the Fed has really gotten to this place now where the markets move on that. So you can’t just look at it as like a paltry 25 point cut. That’s not the way things work anymore.
But it’s this disconnect now between the Fed saying we’re going to go with a slow tempo and the market thinking that the Fed’s going to go with this fast tempo. And I think the Fed wants to go slow and steady because inflation is still 3% land, not the 2% land that the Fed wants to get to. So slow and steady seems to be the race, but it’s really going to depend upon on the jobs numbers and stuff.
Jeremy Owens: Right. That’s exactly where I was going, Greg, is the pace there is definitely going to be dictated by what we learn about the labor market. We get the August report after Jackson Hole, and that could really be a determining factor in how fast they move.
Greg Robb: I mean, I think that report, but also the reports coming forward from there for the rest of the year are going to be really super important. We’ve gone from this period where the inflation reports were the most important ones. Now it’s both inflation and the labor market reports. We’re just going to have to keep an eye on that labor market and also people spending those numbers are going to be important.
Just to give people a ballpark, the Fed thinks that a neutral rate that doesn’t do anything to the economy, doesn’t push it up, doesn’t push it down, is somewhere around 3%. And right now the Fed rates are up in the 5.25 range, so there’s a long way to go to get back to that base camp.
Jeremy Owens: Yeah, it does seem like while inflation is still a concern, it’s at least at a consistent level right now. It’s still higher than the Fed would like it. They aimed for 2%. It’s closer to three. But at least it seems kind of docile there at that 3% right now.
Greg Robb: I think that’s a little bit overstating the case. Inflation is pretty gnarly. The Fed wants to get it down to 2% because they think that’s the place where people forget about inflation and people don’t factor it into their daily lives. I think we’re a long way from that.
Jeremy Owens: One of the other signs of a recession we had was the inversion of the Treasury yield curve and now the disinversion. And Greg, I’ll try to explain this very briefly for the listeners. Basically, when the two-year Treasury is paying out more than the 10-year Treasury, that’s an inversion and a sign recession is on the way.
And then when that disinverts, when the 10-year gets pushed back higher than the two-year, that is typically a sign that a recession is actually here. And that last one is what happened recently. Now, look, there’s a bit more to this. You can get into it if you want. But I’m wondering very simply, is the yield curve a reliable recession indicator?
Greg Robb: I mean, from my point of view, the yield curve is not an indicator that people should pay too much attention to. It does look like the bond market thinks there’s going to be a recession. It’s the doubts about the economy that have come back into the bond market. And the fact is that the stock market is so high, there’s a disconnect there between those two markets.
From my point of view, the yield curve, that’s less of an indicator. The Sahm rule is in that same camp. All these rules that we used to have pre-pandemic are coming up short now and things are different coming out of the pandemic than they were before.
Jeremy Owens: I mean, pretty much since the pandemic hit, it has just been a strange economy that’s been very hard to predict and very hard to know exactly what is going on at any moment to me.
Greg Robb: I mean, I think that’s partly right, but also the market has been strange. Everybody always says, “Oh, it’s the economy doing this and the economy doing that,” but somehow the markets have been acting strange. And there was an economist who told me this week that the biggest risk to the economy is the financial markets themselves. They’ve gotten way too frothy expecting all these earnings to keep going up and that the Fed is going to be cutting so much. If investors start pulling back because the markets are swooning, that could be a real risk to the economy too.
Jeremy Owens: It happened right after the July labor report and seemed like people were nervous about the economy, but it does really feel like the earnings that continue to roll in and look strong have been the reason that the market then bounced back.
Greg Robb: I just want to push back on that a little, because even though people pin that on the economy, I think the market is worried about the market. Everybody plays until the music stops. So it’s the combination of things. The market has done so well that they’re nervous about stuff and they’re pinning it on the economy when we’ve just been writing about this economy all the time, saying like, listen, the labor market’s slowing, folks, but the market wakes up and gets really jittery. So it’s an interesting time.
Jeremy Owens: It is, and I think to add to what you’re talking about with the market, investors keep putting money in so the market goes higher. It’s the same with the economy and consumers. They continue to spend, and so the economy continues to sustain. And I think the staying power of both of those things are potentially the most important thing to watch going forward.
Greg Robb: I mean, never bet against the U.S. consumer. I mean, I think that is maybe the one rule that has survived the pandemic. We’re not only just propping up the U.S. economy, we’re also helping the global economy with what we do. We should be saving a little bit more. We should be putting some things away for the future, but we’re not doing that. We’re spending.
Jeremy Owens: Well, that’s what we’re going to talk about next, Greg. Thank you so much for taking the time, and we’ll be back to talk to you after Jackson Hole about what you learned.
Greg Robb: Oh, it’s my pleasure.
Jeremy Owens: We’re going to take a quick break. Coming up, what you can do to prepare for a potential recession. Stay with us. Welcome back to On Watch by MarketWatch. Before the break, we talked with Greg Robb about whether we’re in a recession, and he noted we could be staring at one next year.
Now we turn to personal finance reporter Venessa Wong to discover what we can do to recession proof our finances in case that does come to pass. You recently wrote about five ways that people can prepare their personal finances for a recession. Can you run through those for us real quick?
Venessa Wong: Yeah, sure. I mean, recession is an incredibly scary concept and it’s difficult to feel prepared for it, but there are five things that we’re advising people to do in preparation for a recession. Number one, have at least three to six months worth of emergency savings. During a recessionary period, if you’re laid off, you are competing with a whole big pool of other people who are laid off in the job market that doesn’t have that many opportunities.
And having more than six months would be advisable. Number two, if you have high interest debt, try to pay it off. Use some of your savings if you have it to pay off some of that debt. Reduce your expenses so that you have extra money to throw at that high interest debt. Number three, if you aren’t able to pay off all of your debt, think about opportunities that will be coming to refinance.
So the Federal Reserve is widely expected to lower interest rates soon. We’re seeing people refinance their mortgages. So there will be opportunities for those who still have debt to refinance at a lower rate and hopefully bring some of those costs down. Number four, if you’re a person who’s close to retiring or you’re in retirement, get that cash lined up in your favor.
So this can be in a high-yield savings account, in money markets or Treasuries, but the idea is to have access to five years of expenses in easily accessible funds, so that, again, you don’t have to tap into the money that you’ve invested for your retirement, your nest egg.
And the last thing that we’re recommending, number five, is to think if you lost your job what your temporary gig would be. All of these things we’re advising are just to think about what would happen if you would lose your job, how would you survive?
Jeremy Owens: Those are some great tips, Venessa, and especially I want to think about emergency savings. Can you really zoom in on that and tell me more?
Venessa Wong: The rule of thumb in personal finance has typically been to have three to six months of your typical monthly expenses. But the amount of emergency savings you’ll need does depend in part on what your life situation is. So if you’re a higher earning individual who doesn’t support other people, then you can get away with three months of emergency savings because you might benefit more from having all of that money invested in the market, at least in the long term.
However, on the other hand, if you’re someone who is supporting a family, you have dependents, you might want to have more in emergency savings just because there are more people involved, more potential expenses that can come up that you can’t foresee. A lot of people say, what’s your bare minimum necessity to get you through that period? I think a lot of people end up needing more.
And what happens is while you’re unemployed, you need some money to get you through until you find another job, but you also don’t know what other unexpected expenses can come up.
Jeremy Owens: And if you have that in a savings account that does pay interest, that’s the best way to do it. Get some kind of yield off that money while it’s there, maybe even grow it.
Venessa Wong: Right, exactly. And obviously six months of expenses and savings is a very difficult bar to reach. Most people don’t have that. The percentage of people in a Bankrate survey who said they can cover six months of expenses was only about 28%.
Jeremy Owens: So let’s walk through the other four rules that you had beyond trying to build that emergency fund and at least a couple of them deal with debt. How should people deal with their debts right now?
Venessa Wong: So another thing that people can consider is paying off their high interest debt as soon as possible. Interest rates are historically high right now. Credit card interest rates are above 20%. Back during the Great Recession, that was only about 13 and change percent. So right now, if you still are holding onto high interest debt, if you have an ability to pay that off or as much of it off as possible, it would benefit you to do that in the event that you do experience some job loss.
Jeremy Owens: And one of the other suggestions you have is if you do still have debt, you should consider opportunities to refinance that debt and get that interest rate down now if possible.
Venessa Wong: That’s right, yeah. I mean, the Federal Reserve is expected to lower interest rates. They’ve been monitoring all of the key metrics, and we are widely expecting the Fed to reduce interest rates soon. So that is going to impact the interest rates on consumer debt such as credit card debt. If you aren’t able to pay that off, it might be worthwhile to look at options for refinancing at a lower rate.
Jeremy Owens: I’ve seen a big jump in mortgage refinancings. Aarthi Swaminathan talked to us about this last week, and it seems like people may be doing that right now in trying to pay off credit card debt by refinancing their mortgage at the current rate.
Venessa Wong: Yeah, we’ve seen people jump on new refinances. We’re in this interesting waiting period right now where we’re seeing what’s going to happen with interest rates, but there might be an opportunity for folks to reduce the amount of interest they’re paying on any debt that they might still have.
Jeremy Owens: And obviously these rules that you’re looking at here are going to be different depending at what point of your life you are in. One of the most precarious times right now as we stare at a recession is those who are close to retiring. I remember a lot of people in this situation when the Great Recession hit 15 years ago or so. What can you tell people who may be close to retiring about how they need to look at the next few months and prepare for a potential recession?
Venessa Wong: That’s right, yeah. So with retirement, obviously your main concern is that you’re not earning money anymore and what you have is invested. So you don’t want to sell when the market is down. One of the rules for retirees is to have up to five years of expenses in cash. That’s a lot of cash to keep on hand. Of course, this is in a high-yield savings account or some other account that’s still helping your money grow.
But that should bring you to a point where if your investments are down, you can weather it until they rebound. It might also be prudent to have 12 to 18 months of their expenses in super-conservative funds such as money markets or Treasuries. Just things that can help them earn money while they’re waiting for the market to rebound.
Jeremy Owens: And so we just have one rule left and that’s planning for if you had to take a temporary gig and knowing what that would be. How should people think about that? Can walk us through that?
Venessa Wong: I mean, that is one of the biggest ways that any upcoming recession would differ from the Great Recession. I think we’ve seen the gig economy really explode in the last 10 plus years. There are options to pick up gigs, driving for ride share, delivery, other sorts of platforms. And these are not jobs that are easy and often they’re not particularly lucrative for the people who do them.
But about a third of people surveyed by Bankrate said that they have a side hustle now. The rate rises to about 45% for those who have kids. So yeah, the gig economy while difficult can carry you through a period of unemployment if you do lose your job during a recession.
Jeremy Owens: We’ve wandered through these. Let me just summarize real quick. Now, three to six months worth of emergency savings is the goal. You do want to pay off any high interest debt as soon as possible. If you do still have debt, consider opportunities to refinance.
And if you retired or close to retiring, really think about how much cash you’ll need to get through the next few years. And last but not least, think about what a temporary gig might be, what you might want to do for a side hustle and start looking into that.
Venessa Wong: That’s right. We don’t know if there’s going to be a recession. We don’t know when there’s going to be a recession or how severe it’s going to be, but we do have some time right now to prepare to help us get through what might be a difficult period ahead.
Jeremy Owens: Well, I want to thank you, Venessa, and I want to point folks towards your coverage on MarketWatch, where you go more in depth on how to manage your personal finances, how to prepare for a recession, and especially how families should be contextualizing this economic situation right now. So thank you so much for joining us, Venessa.
Venessa Wong: Thanks so much.
Jeremy Owens: Before we go, it’s time for what we are watching, a look at the news you need to know for the rest of the week and beyond. We’ve talked about consumer spending driving the economy, and that’s certainly the case as summer approaches its end. Retail sales in July showed the biggest jump in a year and a half, thanks to a sudden surge in car sales. And those car sales contain another switch in consumer behavior, thinking smaller.
While America has long preferred large trucks and SUVs, smaller and cheaper cars are proving popular. With interest rates declining ahead of an expected rate cut, now might be the time for you to jump back in the market for a car as sales volume could lead to deals. While retail sales figures show that consumer spending has stayed strong, revised figures show that the job market was not as hot as we thought.
On Wednesday, the federal government revised its previous estimates for job gains, removing more than 800,000 jobs from figures for a full year ending in March 2024. And that took us from roughly 2.9 million jobs created in that time period to more like 2.1 million. That change is definitely going to have an effect on Jerome Powell’s outlook since it’s so based on the labor market right now.
Now, Powell’s big speech at Jackson Hole will take place Friday at 10 A.M. Eastern Time. And as we already discussed, Greg Robb will be there for live coverage. So make sure to check MarketWatch for updates and read throughs. And next week brings perhaps the most important earnings report of the quarter from NVIDIA. The AI chip giant is scheduled to detail its financial performance on Wednesday afternoon.
Now, the stock hit a low point on August 7th, but has gained more than 30% at times from that delta as investors await this report. The word of the day for that earnings report is Blackwell, NVIDIA’s next chip, that has been delayed slightly. Any news about that next generation of chips and when it will start making money for NVIDIA will be the information to watch for.
And that’s it for this episode. Thanks to Hannah, Greg, and Venessa for joining us. To keep following the latest on the economy, head to marketwatch.com. You can subscribe to the show wherever you get your podcasts, and please do. If you like what you heard, please leave us a rating, a review. It really helps others discover the show. And let us know what you want to hear from us.
You can reach us at onwatch@marketwatch.com. The show is hosted by me, Jeremy Owens, and produced by Alexis Moore and Jackson Cantrell. Isaac Gaines mixed this episode. Melissa Haggerty is the executive producer. We’ll be back next week with a new episode. And until then, we’ll be watching.
