This scenario could tip the US into recession. Here's how to prepare

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This scenario could tip the US into recession. Here's how to prepare.

general :: 8hrs ago :: source - usa today

By Rachel Barber

As rising prices at the gas pump hit consumers’ wallets, Americans already hunting for cheaper fuel may soon confront a bigger challenge: preparing for a potential recession.

Oil price surges resulting from the Iran war drove inflation expectations and recession odds higher in March, according to a Moody's Analytics model. The firm's chief economist Mark Zandi said in a note that even before the war began, the firm’s model had raised the probability of the United States entering a recession in the next 12 months to an “uncomfortably high” 49% − essentially a coin flip.

Other firms’ recession odds aren’t quite as high. Oxford Economics places the odds at 30%, but a sustained stretch of oil prices above $140 a barrel could put enough pressure on growth to push the economy into one, according to Matthew Martin, the firm’s senior U.S. economist.

Brent crude, the global oil benchmark, hit $117 a barrel on March 31.

“I don’t think anyone, certainly the U.S. economy, wins with a longer war,” Martin told USA TODAY. “The longer it lasts, the more likely something breaks.”

More: Gas prices reach highest point in years. How Iran war is hitting consumers

What would it take for the US to enter a recession?

The length of the Iran war, now in its fifth week and approaching the end of the Trump administration's initial four-to-six week timeline, will have the largest impact on whether the United States enters a recession this year, Martin said.

While he still assumes the conflict will resolve within the next month or two, Martin said if oil costs stay elevated for long, consumers who need to drive will have to shoulder higher gas prices and will therefore cut back on spending elsewhere. Because oil is part of nearly every supply chain, sustained high costs could eventually raise the price of almost everything, and cause consumers to further pull back spending, he added.

"Now you have businesses who aren't seeing as much demand. There's also probably higher uncertainty involved, so they might reduce their overall hiring rate even further," Martin said. "As the unemployment rate goes up, we see further decreases in demand as people lose incomes, and that could become a circle of destruction."

He added that a prolonged conflict means it's likely equity prices will dip, which could drive even high-income earners who have largely been driving consumer spending to pull back.

"If they're pulling back as well, middle- and low-income households are being impacted by higher prices, that's really going to be a bit of a storm the economy might not be able to weather," Martin said. "That would ultimately bring about a recession."

What can Americans do to prepare for a recession?

Miklos Ringbauer, a certified public accountant in Los Angeles, advises his clients to build up their emergency funds. The traditional wisdom is to have three-to-six months of expenses saved. During a recession, when landing a new job often takes longer, Ringbauer suggests having enough saved to last a year.

He advises those without savings who might need to rely on credit cards to take time to review their cards' interest rates. You'll still have to pay the money back either way, but a zero percent introductory rate for a year is better than a card charging a 20% interest rate from day one. Remember to read the fine print.

While they can't control gas prices, some Americans are finding ways to pay less at the pump. Take a page from their book, and brave long lines at Costco or Sam's Club, download the GasBuddy mobile app to track prices, or take advantage of fuel rewards programs.

Ringbauer said each decision should depend on an individual's circumstances.

"As long as you see that there's a deal that's beneficial for you and it fits into your projections, by all means, do it today because by tomorrow, everything will be more expensive, as we have seen over the last couple of years," he said, adding waiting makes sense in certain cases, too. "For example, if we have a recession, a lot more people will lose their jobs in the process. There will be more foreclosures. Then you may be able to buy properties that are in foreclosure."

Who decides when the US enters a recession?

Eight economists who serve on the Business Cycle Dating Committee within the National Bureau of Economic Research (NBER), a nonprofit research organization not affiliated with the federal government, make the call.

They are appointed by NBER president James Poterba, who has held the position since 2008, after consultation with committee chairs and the nonprofit’s board of directors.

The committee has maintained a chronology of U.S. business cycles since its creation in 1978. Without an alternate chronology compiled or published by the U.S. government, the committee became the go-to source for formally identifying recessions.

What is the definition of a recession, anyway?

The NBER defines a recession as a “significant decline in economic activity that is spread across the economy, lasting more than a few months.” Three criteria − depth, diffusion, and duration – need to be met individually to some degree to formally identify a recession, according to the NBER.

The committee considers several factors, including inflation-adjusted income excluding government benefits, payroll employment, consumer spending, industrial production, and gross domestic product, when making its determinations.

“Most of the recessions identified by our procedures do consist of two or more consecutive quarters of declining real GDP, but not all of them,” NBER explains on its website.

How fast does the NBER decide when the US is in a recession?

The most recent and shortest recession in modern history was during the COVID-19 pandemic, lasting from February to April 2020.

The NBER identified the recession in June of that year, months after it began. It took another year before the NBER announced in July 2021 that the recession had ended in April 2020.

NBER says its other recession determinations have taken between four and 21 months. There is no fixed timing rule. The committee waits until it’s confident to make a confirmation, according to NBER.

"Most people won't know they're in a recession while it's happening," said Dean Lyulkin, CEO of Cardiff, a small business loan company. "It doesn't feel like a switch flips. It shows up unevenly through layoffs in certain industries, tighter credit, and slower activity. By the time it's officially called, it's usually already obvious in hindsight."

Reach Rachel Barber at rbarber@usatoday.com and follow her on X @rachelbarber_

This article originally appeared on USA TODA