Should You Be Recession Planning? It Depends on Who You Ask.

Your clients may be wondering if the U.S. is in a recession. Know how to answer and how to respond.

Gross domestic product, a key indicator of economic health, fell for the second-straight quarter of 2022. The Commerce Department said Gross Domestic Product (GDP) contracted at a rate of 0.9% in the second quarter, following a 1.6% contraction in the first quarter.

GDP falling for two consecutive quarters is often seen an indicator of a recession, but is that going to be the case now? Some economists and members of the Biden administration¹ say it’s not that simple, and other factors — including low unemployment, a robust labor market, and substantial household savings — are blunting the concerns that the U.S. has entered a full-blown recession.

Still, the mood is tense. Inflation remains high,² and according to the Pew Research Center, only 13% of adults in the U.S.³ consider the economic conditions excellent or good, down from 28% who said the same just six months ago. This presents a conundrum for financial professionals: how do you allay concerns about a recession with your clients while staving off any potential losses?

What is a recession?

Is the U.S. in a recession? Despite two-straight quarters of falling GDP, many economists will say no, not just yet. In addition to other factors, there’s the fact that GDP is often revised in the coming months, so these figures might change. Although the economy is undoubtedly in a precarious position, there are a few other hallmarks of a recession⁴ the U.S. has not experienced yet. They include:

• Decreased consumer spending
• Mass layoffs
• Declining job openings

Recessions are officially designated by the National Bureau of Economic Research, which often makes its decision long after a recession has actually begun, so it’s crucial to keep an eye out for these tell-tale signs.

What’s causing the slowdown?

The economy seemed to be humming along in 2021, and even in the earlier part of this year — so what happened? There are myriad factors, but a lot of it can be tied to the pernicious, sticky inflation and the Federal Reserve’s response of raising interest rates. The rebound in demand following the Covid-driven supply shock compounded by the Russia-Ukraine conflict have placed significant upward pressure on food, energy, and automobile prices, in particular

“The pandemic created excess demand for certain products that couldn’t be met, resulting in ‘sticky’ inflation that is hard to get rid of,” Henry McVey, head of the Global Macro, Balance Sheet and Risk team for KKR, told Global Atlantic earlier this year.⁵ “It takes time for these constraints to be worked out and, in the meantime, these higher-than-planned prices can cause ripple effects throughout the economy.”

Time to talk

Given the high risk for a recession, it’s crucial for financial professionals to take steps to help mitigate their clients’ fears and concerns. These conversations are never easy, but there are a few steps you can take that may help make the discussions go more smoothly.

1. Communication is key. There’s never been a more important time to keep up frequent communications with your clients. According to the National Association of Insurance & Financial Advisors (NAIFA).⁶ Whenever there is negative news, you should connect with your clients to check in and offer to set up a meeting to talk if they have any serious concerns.
2. Come prepared with options. Frequent communication is only as good as the content of your discussions. Have solutions and recommendations that can help to weather the coming storm and provide a variety of options.
3. This too, shall pass. The headlines may be troubling, but it’s important to remind your clients that this markets aren’t typically forever; a typical recession⁷ averages just over 10 months. Depending on a client’s situation, it may simply make sense to stay the course until economic conditions improve.

While the prospect of a recession will certainly cause anxiety, McVey also believes that it will look nothing like the Great Recession that lasted from 2007 to 2009 — something else that can help alleviate your clients’ concerns.

“Importantly, this current downturn is not likely look anything like 2007; it is likely to be much milder,” McVey says. “Key to our thinking is that we see unemployment increasing 150 basis points this cycle, well south of the average of 275 basis points for a recession and a fraction of 2007’s massive surge in unemployment. We also don’t expect a severe mortgage default rate, and we don’t see banks needing to de-leverage.”

In addition to addressing pressing issue, these conversations present an opportunity to rethink your clients’ retirement strategies and take a fresh look at income streams, spending, and investment mixes. It could also be an appropriate time to highlight the benefits of certain annuities during uncertain economic periods.