Money Rehab with Nicole Lapin - Why We're Not Out of the Recession Woods Yet

Episode Date: August 2, 2023

On this week's roundup of the biggest headlines in finance, Nicole explains why we're not celebrating a soft landing just yet, what you can expect from airline prices, and the purple shake heard round the world.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Here's your weekly roundup of the biggest headlines on Wall Street and how they affect your finances. The past week or so, the media has been stoked about the chances of an economic soft landing. And before I get into what a soft landing is, let me share with you one totally and completely true fact that should frame

everything you hear about the economy. Here it is. No one knows the future. Not one. Not J-Pow. Not Jim Cramer. Not your mom. Not your friend who always asks what your rising sign is when you do something stupid. Not your dreadful ex-boyfriend who bought crypto at $35 and has never once shut up about it since. When it comes to your money, anyone who tells you they know 100% for sure what the future holds is either deluded or trying to make money off you somehow. With that caveat in mind, we can look at the historical data, we can look at the models, we can look at all available evidence and make reasonable guesses. But when talking about

something as complex as the economy, it is totally possible for really smart people to look at all the same evidence and draw different conclusions. And even with the best guesses, sometimes things happen that throw everything out the window. Things like a global pandemic, a natural disaster, a war, a protest, an election, an unhinged rant on Instagram. Sometimes we end the day in a very different world from the one we woke up in. With the caveat in mind that prognosticating is hard and life is full of risk, let's take a look at how likely a soft landing is. The best soft landing is obviously jumping onto a bed with a

big fluffy comforter and a pillow topper, duh. The second best is an economic soft landing. An economic soft landing is what central banks hope to achieve when inflation goes bananas. It's the process of a central bank, like the Fed, raising interest rates to trigger an economic slowdown that manages to reduce inflation, but doesn't cause a recession. A recession in this context is a serious economic contraction, like two quarters of negative gross domestic product growth. This isn't about your 401k looking a little smaller or your neighbor losing their job. This is bigger. Now, the Fed has managed this before at least one time that everyone can agree

on. Obviously, it's notoriously difficult to prove a negative. How could you say for sure something that didn't happen would have happened without specific interventions? Regardless, there are a number of other times that some economists believe the actions of the Fed helped to avoid a hard landing. But in 1994, when Alan Greenspan was the chairman of the Federal Reserve and the Lion King was in theaters, the Fed raised rates up to 6% and managed to stick to a soft landing by all accounts. But some analysts think the Fed can't manage that trick this time around. This is in part because of what they're seeing from traditional economic indicators, including the big one we've talked about on this show before, the yield curve. A quick refresher, the yield curve is a chart

that tracks the relationship between the three-month and the 10-year yield on treasuries. When the short-term interest rate is higher than the long-term interest rate, it's historically been a reliable signal that a recession is coming. This curve has been locked on warning mode for months now. And all that optimism that's been buzzing around? Some economists warn that we've been there before, too, and that a recession is often preceded by everyone congratulating themselves on a soft landing. These economists point to the unexpected consequences of raising rates. The 2008

recession was caused in part by people being given adjustable rate mortgages who could not afford them. And then when the Fed raised rates, many of those people could no longer complete their payments, which in part caused the housing bubble to burst and then triggered a series of events that led to a recession. In that situation, the Fed raising rates had the unintended consequence of making things worse in a way that no one could predict. And it took a while for those consequences to show up, allowing people to think that the worst had already passed. There are also some glaring weaknesses in the current economic landscape. Savings rates are dwindling and the cost of credit is rising rapidly, increasing the debt burden for many families. These factors bolster the case of those who say it's a little early to break out the champagne. Let's do a quick wrap up

of the other headlines. Chinese fast fashion giant Xi'an reported that they turned a profit for the first half of this year. Last year, they only broke even. They're also expanding into new markets, which boosts claims that they're attempting to become a publicly traded company. Also, domestic airfare has decreased, which has led to lower inflation numbers and lower profits for airlines. This is making customers very happy, but shareholders, not so much. Also, you know how everyone on TikTok was covered with purple grimace shakes for a minute there? Well, that trend resulted in real world returns with McDonald's revenue beating expectations for the quarter. And on the financial

services front, a higher net share of banks are reporting that they have raised the standards for qualifying for loans since the Fed raised rates. But they're also reporting that the demand for loans from large to mid-sized firms hasn't been this low since 2008. For today's tip, you can take straight to the bank. While actual banks may be raising their standards, you should raise yours too. Don't take out a loan without shopping around for the best interest rates possible. Double check, but most banks are willing to quote you a rate with a soft credit check that's the kind that doesn't hurt your credit score. Once you match with a loan provider, they will perform a hard credit check,

which will knock off a few points from your credit score, but those will be recovered quickly by paying back that loan. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehabatmoneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening

and for investing in yourself, which is the most important investment you can make.