Nov 9, 2022
While we adhere to strict editorial guidelines, partners on this page may provide us earnings.
No two recessions are alike. But the potential recession in 2022 is looking like the most unique one we’ve ever seen.
Some traditional signs of an economic slowdown are already upon us. U.S. GDP has shrunk for two quarters in a row — the textbook definition of a technical recession.
Advertisement
Meanwhile, homebuilding activity has plummeted while consumer confidence is at its lowest point since the pandemic erupted. However, President Joe Biden said on Thursday that the nation remains "on the right path."
Thanks for subscribing!
Read the best of Moneywise in 5 minutes or less.
By signing up, you accept Moneywise Terms of Use, Subscription Agreement, and Privacy Policy.
Here are three big reasons why the upcoming recession is different.
The labor market is robust
In most recessions, economic output and employment decline simultaneously. Lower revenue compels businesses to cut back on staff, which leads to higher unemployment. Ultimately, higher unemployment leads to lower consumer spending and that creates a vicious cycle.
In 2022, however, unemployment is still at a record low. The official unemployment rate in June was 3.6% – the lowest since February 2020. A robust job market is “historically unusual” during a recession, according to economists at Goldman Sachs.
This unusually strong job market could be deriving strength from another unusual source: corporate financial strength.
More: Got spare change? Here's how to easily invest your money if you're not rich
Must Read
- The ultra-rich use these 5 real estate strategies to build wealth while they sleep — you can start with just $100
- Here’s the average income of Americans by age in 2026. Are you keeping up or falling behind?
- Insurance companies profit most from drivers who auto-renew without shopping around. Comparing 100+ quotes takes 2 minutes and costs nothing
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Companies are cash-rich
Corporations see a decline in sales and earnings during recessions. That process may have already started. However, U.S. corporations are sustaining profits and sitting on an immense cash hoard going into this recession.
Advertisement
The average U.S. corporation’s after-tax profit margin is around 16% right now. In traditional recessions, this rate drops down to single digits. Meanwhile, these corporations are collectively sitting on over $4 trillion in cash. That’s a record level and also highly unusual for a recessionary environment.
Companies may have raised these funds during the era of easy money and low-interest rates over the past decade. Now, this cash is acting as a buffer and could allow companies to retain staff despite the economic slowdown.
Rates are rising
Another unusual factor of this recession is the Federal Reserve’s hawkish stance. In most recessions, the central bank cuts interest rates and adds more money to the economy to stabilize it.
In 2022, however, the Fed has been aggressively raising rates to curb inflation. Considering the strength of the job market and corporate balance sheets, the central bank may have more reason to keep raising rates.
Advertisement
More: Take a break from your debt this month with the help of Credible
What comes next?
“This is unsustainable,” says WSJ’s Jon Hilsenrath. He believes that one of two things must happen to resolve this misalignment: either the economy recovers swiftly, ending the recession, or the economy keeps dipping, compelling employers to cut jobs.
These two scenarios could potentially be the “soft landing” and “hard landing” the Fed has previously mentioned. Investors need to keep an eye on all indicators to see which scenario is playing out because the impact could be severe.
This could be an ideal time to bet on beaten-down growth and tech stocks if a soft landing occurs. However, in a hard landing investors may need to take refuge in asset-backed defensive stocks like healthcare companies and real estate investment trusts.
In either case, 2022 is shaping up to be an interesting year for investors.
You May Also Like
- JP Morgan sees gold hitting $6,000/oz before 2027 — and a Gold IRA lets you hold the physical metal while deferring the tax bill. Get your free guide from Priority Gold
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Millionaires under 43 are reshaping investing — just 25% of their portfolios are in stocks. Here’s where their money is going
Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
