Escalating trade wars, federal worker layoffs and market turmoil make for a gloomy economic future. But you can prepare.
Column by Michelle Singletary
It’s okay if you’re not okay.
Whether you’re living paycheck to paycheck or have healthy savings, the erratic tariff battles of President Donald Trump are tanking markets and fueling expectations that a recession is coming.
With workers, businesses and consumers increasingly alarmed, Goldman Sachs has raised its 12-month recession probability from 15 percent to 20 percent, while J.P. Morgan’s chief economist has upped the odds to 40 percent, a significant jump from the 30 percent prediction at the start of the year.
“If we get the impression that they’re moving ahead with even larger tariffs than we now expect, or if the White House just signaled that it’s really committed to its policies, even in the face of weaker economic data, either of those developments might imply that the recession probability is higher,” David Mericle, chief U.S. economist at Goldman Sachs, said Monday during a podcast on tariffs and the U.S. economy.
The tariff timing couldn’t be worse.
It already feels like you need a micro loan to buy eggs, with the average cost of a dozen jumping by 10.4 percent last month.
Your old car is one breakdown away from the junkyard, but you can’t afford to replace it if Trump’s tariff war escalates — leading to even higher prices for new and used cars. The average monthly auto loan payment was a record $754 in the last three months of 2024, with some borrowers paying $1,000 a month.
Even if you can’t bear to look at your 401(k) retirement account (I haven’t), you know its value is down. The S&P 500 — a key gauge of market performance — tumbled into a correction on Thursday, which is a 10 percent drop in the price of a stock or index.
“Typically, we see corrections when there’s a noticeable crack in the economy, or when the market needs to cool off after a long stretch of gains,” Callie Cox, chief market strategist for Ritholtz Wealth Management, wrote in a market alert Thursday. “We think today’s correction is a mix of both dynamics. The economy is under pressure from years of high interest rates, plus large-scale government layoffs and policy-related uncertainty.”
If an economic downturn is inevitable this year, here are some ways to prepare your finances and mind.
Pay down credit card debt — now
If you have been battling credit card debt, your top priority should be to pay off your balances as soon as possible.
If you lose your job, you may have no choice but to focus on paying for essentials — a roof over your head and food on the table — not shelling out interest payments on unpaid credit card debt.
When faced with budgetary constraints, households understandably prioritize certain debts, such as their mortgage or auto loan, according to a recent analysis by the Federal Reserve Bank of New York.
But having to pause payments on your credit card debt is expensive. The median average credit card interest rate for March is 24.2 percent, according to Investopedia, which tracks rates every month. There’s already an “upward trend in credit card defaults,” the New York Fed reported.
One way to tackle the debt is to get a low-interest personal loan or sign up for a balance-transfer credit card. You can eliminate debt much faster if you transfer high-interest debt to a credit card with a zero percent rate. If you can’t qualify for that, call your credit issuer and ask for an interest rate reduction.
Stockpile savings
A recession can quickly change your circumstances. Low and high earners can be affected.
If you don’t have an adequate rainy-day fund, it’s time to look for cuts, increase your income to help boost savings, or both.
Got vacation plans? Put that summer trip to the beach on hold until you have a decent cash cushion. Otherwise, you’ll have to rely on debt.
If you’re already living on less and there’s no room for further budget trims, or you can’t work any more hours, look for larger lifestyle changes. If your rental lease is up soon, consider moving or getting a roommate.
I know this isn’t an easy decision or doable for everyone, but I often recommend people to think of a family member or friend who might be willing to take them in. In one case, a high-earning couple trying to pay down debt and save moved out of an expensive apartment and in with godparents for nearly a year. Along with cutting other spending, the move greatly improved their financial situation, allowing them to pay off $25,000 in debt.
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Washington Post illustration; Michelle Singletary; iStock (Washington Post illustration; Michelle Singletary; iStock)
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Establish a backup to your emergency fund
In addition to having a recession rainy-day fund, figure out where you might go for additional funds if you need them in a pinch.
If you’re a homeowner, consider getting a home equity line of credit (HELOC), which allows you to borrow money using the equity in your home. But only use this line of credit as a last resort should your savings run out — and make sure you understand all the fees and interest costs associated with a HELOC.
Curb your consumerism
People buying stuff fuels the U.S. economy.
Consumer spending on goods and services in the U.S. economy accounts for about two-thirds of domestic spending, according to the Bureau of Economic Analysis.
But much of this consumption is funded with debt. Total household debt increased by $93 billion to $18 trillion in the last quarter of 2024, according to the New York Fed. Credit card balances were up by $45 billion from the previous quarter, ballooning to $1.21 trillion.
If there’s a recession and you lose your job, carrying a lot of debt makes it harder to recover. Or you might be forced to take part-time work if you can’t find a full-time job.
According to the Bureau of Labor Statistics, the number of people employed part-time for economic reasons increased by 460,000 to 4.9 million in February. These are individuals who would have preferred full-time employment but couldn’t find any — or who saw their hours reduced. This can also be an early sign of a downturn.
Meanwhile, federal government employment declined by 10,000 in February — even before Elon Musk’s U.S. DOGE Service orchestrated massive layoffs of civil service employees. Those cuts are already taking a hit in some local economies, like the D.C. metro area.
If you’re servicing a lot of debt, reduce your consumption. Then actively save the money you aren’t spending.