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Tags: inflation | budget | home ownership | recession | biden

Recession Could Send Some Americans Over a Financial Cliff

Recession Could Send Some Americans Over a Financial Cliff

By    |   Monday, 27 June 2022 10:05 AM EDT

The $2.8 trillion in stimulus and $6.7 trillion increase in the national debt the U.S. government has spent since the pandemic began, kept the economy from going into a downturn and gave some relief to Americans and major industries that would have been decimated by COVID.

But many who were in poor economic shape before the pandemic are even more marginalized today. With a recession looming, they’re now worried about losing their jobs.

One could say, millions of Americans stand at the precipice of an economic cliff.

Dallas area resident Kat Johnston is dealing with the twin phenomena of feeling burned out and inflation. The 31-year-old is considering changing jobs because the pandemic assistance that kept her afloat has dried up.

The savings she accumulated is “pretty much gone now. As things have gotten so expensive, it’s almost a paycheck-to-paycheck life,” Johnston tells The New York Times. Lamenting the sharp increases in gas prices and rent, the last remaining assistance for Johnston is a student loan moratorium, but she knows she may need to restart payments on her $65,000 in student loans soon.

Young Families Struggle

Rising mortgage rates and inflation are pricing many first-time homebuyers out of the market.

A median American household needed 41.2% of its income to cover payments for a median-priced home in April, according to the Federal Reserve Bank of Atlanta—up from 32.6% at the end of 2021.

This makes home ownership the most expensive for an American family since 2006, the Wall Street Journal notes in “What It Takes to Buy Your First Home Now.”

Going to open houses where there are 30 to 40 other people or couples, and losing out on a home to a higher bidder “definitely scares me,” 26-year-old Jacquelyn Pica tells WSJ. “It’s not like it will be more affordable in a year, with interest rates rising.

“It’s just so ridiculous and disheartening.”

The WSJ goes on to explain the importance of home ownership in building wealth, especially for the middle class, with its property appreciation and tax breaks. In 2019, the median homeowner had $254,900 in wealth—compared with just $6,270 for the median renter, according to the Federal Reserve’s Survey of Consumer Finances.

For working parents Brandy and Kurtis Sandersfield, the end of the expanded child tax credit has resulted in dwindling savings and high inflation eroding any prior sense of fiscal stability. While Kurtis has taken a second job, the parents worry about what a recession and layoffs would mean.

“You always want to do better for your children than what you had, and I felt like I was headed that way,” Kurtis tells the NYT. “Now I feel like we’ve been kicked down the mountain. We have the whole mountain to climb again.”

The Arrival of a Financial Cliff

Economists describe today’s rocky conditions as a “long-predicted cliff” finally arriving: the cliff being an end to pandemic aid programs, coupled with rising inflation and higher interest rates, marking the end to inflation. However, the Federal Reserve’s fiscal actions run the risk of tipping the U.S. into recession—resulting in more dire personal financial situations.

The statistics are jarring. Americans’ personal savings rate are at their lowest level since the 2008 recession. The student, auto, and medical debt of Americans stands at record highs.

Consumer confidence is at its lowest level since 2009, with just 14% of Americans ranking the economy as “excellent or good.” Americans have an average of $9,000 less in savings now when compared to last year, and the average amount of personal savings has fallen by 15% in a year, CNBC reports.

Inflation Outstrips Raises

As prices at the grocery store rise and baby formula shortages continue, food insecurity across the country is harming vulnerable families the most.

For workers, inflation has outstripped pay gains for months.

More Americans are working side gigs and in second jobs just to pay for living expenses amid rapidly rising inflation. A recent survey from Bankrate found that among the Americans who work side jobs, 41% need the extra income to pay for living expenses, a 10 percentage point increase from 2019.

The effects of inflation are impacting seniors particularly hard, with fears of running out of their savings forcing more retirees back into the workforce. There have been numerous reports of seniors, especially those on fixed incomes, struggling with inflation, leading to a rise in senior homelessness, delayed retirement and retirees’ purchasing power waning.

Nearly four months later, as energy costs spike during the summer heat, the plight of seniors is worsening, forcing an increasing number of seniors to visit food pantries and try to budget their Social Security checks more frugally.

Twenty-five percent of those not yet retired say they are going to have to postpone those plans.

Seventy-one-year-old Joyce Silla tells Houston’s KHOU-11 News her savings “are gone. It’s depleted. No savings. If I can make it from one month to the other month, that’s good.”

Steve Benton, a financial counselor with The Senior Source, says older folks “are being hit significantly because seniors are on a fixed income. The inflation of housing, food, energy – energy being utilities and gasoline – all of them are skyrocketing, and that’s 75% of a typical senior's budget.”

As the U.S. faces economic threats from multiple fronts, such as inflation, an end to pandemic era assistance, and more Americans with depleted savings looking for a new or even a second job, Morgan Stanley Global Chief Economist Seth Carpenter is warning of rough going in the months ahead.

“The transition is going to be very difficult. At least historically, it takes a really long time for inflation to come down, even after the economy slows,” Carpenter says.

Recession? What Recession?

While President Biden and members of his team continue to repeat the mantra that “a recession is not inevitable,” some of the top Wall Street luminaries disagree. Goldman Sachs cut its U.S. GDP outlook and raised the risk of recession in the next year to 30% on June 21st, up from its last forecast of 15%.

In a letter to clients, the investment bank wrote, “We now see recession risk as higher and more front loaded.”

In May, former Goldman Sachs CEO Lloyd Blankfein warned Americans should prepare for a recession, insisting it is a “very, very high risk.” 

Influential figures including Elon Musk and economist Nouriel Roubini are sounding the recession alarm. Additionally, a team of leading economists surveyed by The Wall Street Journal see a 44% probability of a recession within the next year, a figure higher than before the 2008 recession, and the highest probability since the paper began the survey in 2005. Perhaps most disquieting of all, JPMorgan Chase CEO Jamie Dimon warns of “an economic hurricane.”

Economists are now debating how severe the recession will be. Hopefully, those whose jobs and/or personal finances were marginalized by 2-1/2 years of COVID-19, will not fall off the economic cliff in the event of a recession, however long or however deep.

© 2023 Newsmax Finance. All rights reserved.

The $2.8 trillion in stimulus and $6.7 trillion increase in the national debt the U.S. government has spent since the pandemic began, kept the economy from going into a downturn and gave some relief to Americans who would have been decimated by COVID.
inflation, budget, home ownership, recession, biden
Monday, 27 June 2022 10:05 AM
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