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Are We in a Recession? Layoffs, Inflation, and Increased Retirement Costs.

February 15, 2023

Recession rumors began in 2022; it may be 2023, but they have not completely subsided yet. Interest rates are up, and the stock markets are still down. Inflation has driven the cost of living and the cost of retirement, are we in a recession?

Last year investors had a tough time with the S&P 500 down more than 18%. This was simultaneous with the costs of borrowing money (interest rates) jumping to their highest levels in over 20 years. These two factors combined with a sharp jump in both layoffs and inflation left many wondering what is in store for 2023. Let's take a look.

1. What is a Recession?  

Historically, a recession is two consecutive quarters of negative economic growth. We saw this in Q1 and Q2 of 2022. Since then the economy got back into gear and grew by 2.9% in Q4. This technically means that we are not in a recession. But do all signs point to us entering one?

2. News of Layoffs. 

Companies like Amazon, Meta, and Microsoft have dominated headlines after announcing layoffs. This news stoked the flames of fear in the hearts of many corporate employees. The good news is that even after the recent bout of layoffs in the tech industry, unemployment is still historically low. Unemployment in the U.S. has averaged around 5.73% over the past 70+ years and is currently around 3.5%. This is good news because paid people tend to be the ones who pay their bills, eat out, and buy new TVs at Best Buy. If people have money coming in then the economy can continue to expand.

Lately, layoffs seem to be isolated to industries that "did too much"...or hired too many people, like tech and real estate. Companies like Amazon and Redfin had record years in 2020 & 2021 when the market was being deluged with economic stimulus. Amazon saw a huge surge in demand and hired over 550,000 new employees during the pandemic. Execs falsely assumed that things could only go up from where they were. Once reality set in and folks were able to return to Target and Walmart; Amazon's demand returned to normal, leaving them overstaffed. This left them with no choice, but to lay off a lot of their recent hires as their forecasts were too ambitious. The good news is that industries hard hit by the pandemic like airlines and cruises are now itching for employees, and part of the reason unemployment is and is expected to stay low.

3. Inflation.

Many have expressed concern about inflation. "If everything is getting so much more expensive, how could we not go into a recession?" The good news is that inflation has quickly subsided as it is down 31% from its June 2022 highs. The Fed stepped in last year and aggressively raised interest rates. This successfully served to cool the white-hot real estate and auto markets returning them back to normal. A year ago we would have said that it seems like a bubble is forming with bidding wars on homes and cars selling well over their MSRP. Thankfully the increase in borrowing costs has corrected the course in these industries.

4. Increased Cost of Retirement.

Recession or not, increased costs have left many wondering if they can still retire when they hoped to.

Higher inflation no doubt means that retirees need to have more money set aside.

Here you can see the amount needed at each age assuming an inflation rate of 3% and investment returns of 5% to get you to the age of 95. Under these assumptions to retire at 65, you would need about 25 times the amount you intend to withdraw each year. If inflation were lower or your investment returns higher this number would drop dramatically. If inflation were just 2% and your investments returned 6% you would only need about 17.5 times the amount 65.

It has definitely been a tough couple of years, but with unemployment low and the worst of the interest rate hikes already occurring there is plenty of room for optimism looking forward to better in 2023.

If you would like to speak with me about your retirement scenario, fears, or financial situation, please schedule a call.

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