Are we heading for a ‘wealth?’ Why the rich lose the most when the economy grinds to a halt

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Key learning points

  • Recessions generally have a disproportionate impact on employed and middle-class workers.
  • The tight labor market could shield workers with lower wages from potential layoffs during a recession.
  • The wealthy could see a bigger blow to their wallets if a recession hits in 2023.

You’ve heard of a recession. But have you heard of one wealth? As the name suggests, this is a type of recession that hits the rich a lot. With the economy’s flashing warning signs, we may be heading for a wealth cession sometime this year.

Let’s see what a wealth cession could mean for the wealthiest, and why we wonder if it could happen in 2023.

What is a Wealth Assignment?

According to the National Bureau of Economic Research, the US economy is not in recession. The last recession declared by the NBER was in early 2020, at the start of the pandemic. But recession fears have been floating around the economy for months.

If the US heads for a recession in 2023, it is possible that we will see what is sometimes referred to as a wealth cession. Rather than primarily affecting the working and middle class, a transfer of wealth would have a more noticeable effect on the finances of the upper class.

How a wealth cession would affect the wealthy

When a recession is coming, the wealthy usually don’t have too much to worry about. They are usually in a good position to weather the tough economic times, the last to be hit and the first to restore value. But in the event of a wealth cession, wealthy Americans may feel a unique crunch on their budget.

Here are two reasons why the wealthiest could lose more than usual during a potential wealth cession:

White-collar layoffs

By 2022, more than 1,000 tech companies will have laid off workers, many of them high earners. The total number of laid-off workers by the end of the year was estimated by the website Layoffs.fyi at more than 150,000. In many cases, the laid-off technicians were higher-salary white-collar workers.

As more tech companies lay off workers in 2023, money could become tighter for the wealthy, many of whom will be forced out of high-paying jobs. The caveat here is that higher-income workers tend to have more transferable skills that can help them find another high-paying job. But if we put it in the context of a highly understaffed labor market, the number of redundancies for white-collar workers is remarkable.

Stock market tumbles

The net worth of the wealthy typically includes a healthy investment portfolio. Since many investors choose to have at least part of their net worth in the stock market, falling stock prices will undoubtedly affect the wealthy.

As recession fears continue to surround the economy, it’s no secret that the stock market has taken a hit. If stock prices continue to fall, even investors with large financial bases could see their net worth plummet.

Coupled with the increase in layoffs, a major stock market crash could leave wealthier people in a more precarious situation than previous recessions.

How a recession would affect everyone differently

If a recession hits, the impact will probably not be limited to those with big wallets. A recession can affect anyone on the economic ladder.

Here’s how a recession can hit the poor and middle class:

High inflation

Inflation has been high for months. As of November 2022, the Consumer Price Index (CPI) report showed that inflation was 7.1% higher than the same time last year. Despite being the smallest 12-month increase since December 2021, that is still significantly above the target inflation rate of 2%.

Inflation affects everyone. Higher inflation means it becomes more expensive to buy what you need. For example, you have noticed higher prices in the supermarket. Many household budgets feel the pinch of these higher prices.

Higher interest rates

With inflation still hot, the Federal Reserve has been steadily raising Federal Funds rates. As interest rates rise, it becomes more expensive to borrow. For example, interest rates on mortgages and new car loans have skyrocketed.

Since many households rely on loans to make large purchases, such as buying a home or vehicle, higher interest rates affect people of all economic statuses. If you’re looking for a new home or vehicle, you could get stuck paying a lot more interest than you did around this time last year.

Saving Grace: a tight labor market

Fortunately, there is good news for those who have jobs in the service industry. Some industries, such as leisure and hospitality, are still struggling to bring staff back to pre-pandemic levels. With that in mind, it seems unlikely that workers in these industries will lose their jobs during a recession.

For example, the number of jobs in places like restaurants and bars increased by 62,000 by November 2022. But that’s still 980,000 jobs less than pre-pandemic levels in leisure and hospitality. If you’ve been dining out lately, you may have noticed that many restaurants are understaffed. This would hopefully allow employees in these positions to continue earning a salary, even in tough economic times.

How to prepare for a recession

If a recession hits, it won’t be a pleasant experience for anyone. But no matter where you are in the food chain, there are some strategies you can use to prepare your household for a recession:

  • Build an emergency fund: you never know what life has in store for you. If possible, accrue three to six months of expenses in an emergency fund. But even if you can only save $100, that little buffer is better than nothing.
  • Cutting back on discretionary purchases: A recession often means everyone has to tighten their belts. If you can, start cutting unnecessary expenses in your budget. This will not only help you save now, but also prevent the stress of cutting back later.
  • Keep your resume on standby: A recession means layoffs are possible. Dust off your resume to prepare for a potential job search.

It boils down

An arrival wealth could hurt the rich more than others, and more than usual. But a recession of any kind is likely to affect households across the financial spectrum. If you’re worried about a potential recession, now’s the time to boost your savings. Extra savings give you more breathing room to recover after losing a job, regardless of your net worth.

One way to profit from a recession is to buy stocks at discounted prices and lead the recovery to profit. But investors need to protect the downside along the way. Q.ai offers a unique downside risk hedging product called Portfolio Protection that can be added to their Investment Kits at any time to protect your profits and reduce your losses, no matter what industry you invest in.

Download Q.ai today for access to AI-powered investment strategies.