Is the U.S. Headed for a Recession?

Key Takeaways:

• Sentiment among analysts is split, with some suggesting we’re moving towards a recession within a year or so, and others saying the future is not quite so clear cut
• As the deadline to fund the government approaches, fears are growing that a shutdown could trigger an immediate recession
• U.S. consumer confidence dropped for the second month in a row, signaling that Americans don’t believe the economy is heading in the right direction
• It’s near impossible to predict a recession, so the best strategy is to always be prepared

Predictions of an imminent and devastating recession have been circulating for years. In June 2020, the World Bank predicted that COVID would send the world economy into the greatest recession since World War II.

Clearly, that didn’t come to pass — although there was a major contraction during the initial phase of the pandemic, U.S. economic recovery was swift and strong.

Like any good doomsday prediction, announcing an incoming recession is bound to cause a stir and generate some publicity for the analyst’s firm, but there are always a lot more predictions of impending doom than there is impending doom.

That said, a broken clock is right twice a day, and there is reason to believe that a recession is headed our way — the problem is predicting when it will hit. And if you can’t predict the timing, then it’s worth about as much as the prediction that someday the president will say something — accurate, but unhelpful.

Recessions are necessary and inevitable but unpredictable, so always be prepared

The economy naturally goes in cycles of expansion and contraction — what comes up must come down. So in a certain sense, it’s practically guaranteed that the U.S. is headed for a recession — but that might not be any time soon.

There are good reasons to believe that the U.S. is, in fact, on track for a recession: U.S. consumer sentiment is down, it’s been over a decade since the last recession, and the government is on the brink of a shutdown.

On the other hand, consumer spending rose 0.6% when adjusted for inflation this past month, and GDP increased at a 2.1% annualized rate for the second quarter in a row.

In short, the picture is unclear — a sentiment echoed by economist Paul Krugman in a recent opinion piece for the New York Times.

Since there’s no way to tell the future, it’s generally a good idea to always be prepared for the possibility of a recession. Even in periods of apparent growth coming out of a recession, it’s possible to end up in a double dip recession.

Being prepared means having a diversified portfolio that includes stocks that can balance each other’s strengths and weaknesses out. Some sectors, like healthcare and value retailers (Costco, Walmart, Dollar General, etc.), historically perform well during recessions. Other sectors, like travel and tourism, don’t usually fare so well.

When you have a portfolio with stocks from many different industries, then even if some tank due to a recession, other investments will usually be able to balance them out to an extent.

The bottom line

Recession predictions stir up a lot of ruckus, but they’re infamously unreliable. Instead of trying to predict the future, you can build a portfolio that is able to handle whatever the unpredictable economy throws at it.