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The US economy grew in the third quarter, reversing a negative trend from the first half of the year – but weakness is looming below the surface and households should not be lulled into a false sense of financial security, economists said and financial advisors.

“I think investors should continue to be cautious … and plan for more disruption,” said Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, based in Irvine, Calif., and CNBC advisory board member. .

Gross domestic product — a sum of all goods and services produced in the United States — rose 0.6% from July to September, the Bureau of Economic Analysis estimated Thursday. This figure equates to growth of 2.6% on an annualized basis.

“For the US economy, a developed economy, that’s very respectable, slightly above average,” said John Leer, chief economist at Morning Consult, a data research firm.

Why it can be “a cold winter”

This GDP expansion marks a rebound after a deceleration in the first and second quarters. Two consecutive quarters of negative growth meet the common definition of a recession – although the National Bureau of Economic Research, generally considered the arbiter of downturns, officially declared none.

Nevertheless, many economists do not expect recent growth to persist.

Overall growth in the third quarter was driven by non-domestic factors, such as an increase in overseas exports, Leer said. But the United States cannot count on strong global demand to continue, in part because of a strong dollar, which makes American products more expensive to buy, as well as economic challenges in Europe, a continued slowdown in China and high food and energy prices. globally, Leer added.

I think investors should continue to be cautious…and plan for more disruption.

Winnie Sun

co-founder and managing director of Sun Group Wealth Partners

He also pointed to a slowdown in residential and non-residential fixed investment, which includes things like home construction and the construction of commercial buildings and warehouses.

And consumer spending, which accounts for two-thirds of the U.S. economy, “has slowed to its weakest pace since the first quarter, when spending hit a wall for the first time in response to the surge in inflation,” wrote Diane Swonk, chief economist at KPMG, in a Tweeter.

“Bottom Line: This is perhaps the strongest and only positive impression on GDP growth we’ve seen in some time,” Swonk wrote. “Pack up for what seems like a cold winter.

And there are concerns beyond underlying weakness in federal data, economists said.

Consumer prices have risen at about the fastest rate in four decades this year, putting pressure on household finances. The Federal Reserve has also aggressively raised borrowing costs to reduce inflation. Rising interest rates have already pushed demand for mortgages to their lowest level since 1997.

“Export growth will soon fade and domestic demand is crushed under the weight of rising interest rates,” said Paul Ashworth, chief US economist at Capital Economics, in a research note. “We expect the economy to enter a mild recession in the first half of next year.”

What consumers can do to prepare for a recession

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What it boils down to: Don’t be lulled into a false sense of security, financial advisers have warned.

While a downturn isn’t inevitable, households can take financial steps to prepare in case a downturn does hit and trigger layoffs and greater market volatility along the way.

“Think of a reasonable worst-case scenario – how would you fund it?” said Allan Roth, certified financial planner and certified public accountant based in Colorado Springs, Colorado.

1. Strengthen your cash reserves

Households should always make sure they have access to cash in case something goes wrong, whether it’s job loss, home repairs or unexpected medical bills, for example. But with the recession, the probability of needing to tap into this financial reserve could increase.

The general rule is to have three to six months of expenses on hand. Sun advises clients to have six months, plus an additional three months for each child in a household.

Consumers should consider adjusting their emergency cash needs based on overall stability, Roth said. For example, someone working in a start-up company typically has a less reliable stream of employment income than a tenured college professor and therefore may need more money, he said.

“Cash” also has a broader definition than parking money in a traditional bank account with paltry returns, the advisers said. Consumers can turn to high-yield online savings accounts or money market funds, for example, advisers said, which currently pay a higher yield.

2. Reduce your debt

Paying off credit card debt and other high-interest loans — and making sure households don’t accumulate more — is also of paramount importance, experts said.

Something that gives this advice even more urgency: variable rates should rise further due to the Federal Reserve’s planned interest rate hikes.

“There is a risk that some people will lose their jobs, and you would hate to see in two or three months people having no savings, going into debt, and that triggering a wave of personal bankruptcies or other forms of financial bankruptcy. “. difficulties,” Leer said.

Customers are showing more financial anxiety these days than they have for many years – but paradoxically many households are spending more to feel better, and that can happen on credit cards, a said Sun. Credit card balances jumped 13% in the second quarter — the biggest year-over-year increase in more than 20 years, according to a recent report from the Federal Reserve Bank of New York.

Sun advises focusing on paying down debt with interest near or above the rate of inflation, which is currently around 8% on an annual basis. The only potential gap would be saving money in a 401(k) plan first until the company match, if that’s available, she added.

Households could also try to reduce their debt burden by downsizing to one car instead of two to reduce monthly car payments, for example, Sun said.

Borrowers with a fixed-rate home loan or another 3.5% loan are in a good position and don’t necessarily need to speed up their debt repayments, Leer said.

3. Stay on track with investments

Investors also need to stick to their investment strategy — and not panic over big losses in stocks and bonds, Roth said.

Withdrawing money and abandoning a well-designed investment plan blocks losses, which currently only exist on paper. The S&P500 the stock market index is down 20% in 2022; Meanwhile, US bonds, usually a ballast when stocks crash, are down about 16% over the past year.

“We’re like heat-seeking missiles,” Roth said. “We are buying high and selling low.”