U.S. GDP drops for a second quarter as financial experts warn of looming recession

food bank
Posted at 5:00 PM, Jul 28, 2022

DENVER — The country’s gross domestic product (GDP) fell 0.9% during the second quarter, according to advanced estimates.

It is the second consecutive quarter of declines. The GDP dropped 1.6% in the first quarter.

“Theoretically, it really means that we are officially in recession, because the technical definition of recession is two quarters of negative GDP growth,” said Kishore Kulkarni, a distinguished professor of economics at Metropolitan State University of Denver.

Unlike previous recessions, the country is experiencing high inflation at 9.1% but low unemployment. Kulkarni says jobs in the U.S. are plentiful and almost all companies are looking for labor.

This time around, though, Kulkarni says it’s the workers who are reluctant to accept jobs because of the circumstances that come with the job, such as and masks, vaccines or non-flexible work schedules.

The Federal Reserve has taken steps over the past several months to try to stave off some of the inflation by raising interest rates by historic levels.

“We clearly increased the interest rate in less than eight months by about 2%, and that is unprecedented,” Kulkarni said.

Over at the Bienvenidos Food Bank in Denver, executive director Greg Pratt doesn’t need to look further than his front doors to see the signs of a recession.

“We knew back in, like, 2007 when there was the real estate bubble that happened. Nobody else was really seeing that, but we at food pantries saw that long before it started being recorded in the news. So we were an economic indicator,” Pratt said.

This time around, he’s seeing similar indicators. The lines at the food bank are getting longer. Pratt is seeing a 25% increase in people coming through Bienvenidos’ doors, while fewer donations are coming in.

“People are telling us that they haven't needed to use a food bank, and they're coming down for the first time,” Pratt said.

Along with inflation, much of the federal and state pandemic assistance has run out, leaving families looking for ways to fill the gaps. For people on fixed incomes, their money simply isn’t going as far.

The food bank has been around for 46 years in north Denver. On an average Thursday, they expect to see around 200 families come in.

Because they’ve been around so long, Bienvenidos knows how to prepare for bad times. When the COVID-19 pandemic hit, Pratt knew hard times would be ahead, so they started setting aside money for a rainy day fund to brace themselves for the future.

But with more need and fewer donations, the bank is spending more on everyday staples like eggs, dairy and meat. Bienvenidos and many other food banks are in desperate need of more donations to help families find healthy meals.

With a possible recession looming, financial advisors say it’s not a bad idea for families to start bracing themselves for bad times now.

“We really want to be prepared in all circumstances. So, be prepared for that layoff. Have that emergency fund,” said Eric Courage, founder and a wealth strategist for Honest Margin.

Courage offered some tips for people to prepare for a recession. First, it’s important for families to start saving up money, but how much depends on your situation.

“If someone is an entrepreneur, they don't know when their next paycheck is coming. You know, maybe that's a longer runway, like 12 months of emergency reserves. If someone is a judge, or a teacher has guaranteed income, maybe that's more like something like three months on hand,” Courage said.

The second piece of advice: make sure to review and understand your debt. Any floating debt like a credit card or home equity line of credit is usually tied to the U.S. prime rate, which just increased. It’s important to review the debt and make sure you can afford the payments.

Third, it might be a good time to think twice about large purchases, like a home or car. With interest rates on the rise, borrowing is more expensive and payments are higher each month.

If you’re uncertain about whether you will have a job in three to six months, or if you’re worried about being laid off, it might be a good idea to open a line credit and start the job hunt for different employment now.

“Also preparing for more taxes. That might sound strange, but a lot of people forget that when you are going through a layoff, or you are receiving a package, you're going to have more PTO, you're going to have severance, you might have any sort of, like, equity compensation. That all gets lumped together, and all of a sudden, you have a huge tax bill,” Courage said.

Taking a closer look at your insurance and planning for COBRA is also important.

Paying off credit cards could be a good idea, but if your job is insecure, you can’t put mortgage or rent on a credit card, so it might be better to keep that cash on hand instead.

Despite the discouraging news, Courage says it’s important to keep in mind that recessions don’t last forever. Bear markets, or declines in the stock market of 20% or more, historically last between 20 and 22 months. Full-blown recessions typically lasts around 14 months.

Bull markets, meanwhile, historically last for 51 to 54 months.

“It's good to remember that even when we're in bad times, life gets better,” Courage said.

So, his bottom line is not to panic, but also be prepared.