For months, economists, academics, and elected officials have argued about whether the United States is in a recession. The “yes” camp points to negative gross domestic product growth in the first two quarters of 2022, meeting the term’s technical definition. Skeptics, meanwhile, point to the strong labor market.
Either way, there are plenty of reasons to worry about the economy’s trajectory. Inflation is still a major concern, at a 40-year high. A recent National Association of Business Economists survey found that 73% are not confident that the Federal Reserve can tamp down inflation while avoiding a recession in the next two years. And just over 1 in 10 business economists feel confident in the central bank’s ability to do so.
Biden administration officials, too, are trying to downplay economic expectations. Officials said on Aug. 23 that they expect slower economic growth and significantly higher inflation this year than they had predicted, as rising prices continued to complicate the nation’s return to a normal state of affairs.
All of which is keeping business economists and others busy trying to game out which industries, products, and stocks may be able to survive, or even thrive, during an economic downturn, and those likely to face a world of economic pain and uncertainty over long-term prospects. Here’s a rough idea.
The Most Threatened
Housing is near the top of industries threatened by a recession. The current economic downturn is due at least in part to the Fed hiking interest rates at a historic pace in its bid to puncture runaway inflation. That makes borrowing costlier, particularly for home mortgages.
After an unprecedented two years of interest rates kept at near-zero levels, the Fed in March finally raised rates by a relatively modest quarter percentage point. But with inflation persistently high, the Fed in May followed up with a more aggressive half-percentage point, or .50 basis point, interest rate increase. That was the biggest interest rate increase since 2000.
But that was hardly the end, as central bank officials announced in June that the Fed would raise its interest rate target by a whopping three-quarters of a percentage point, the biggest hike since 1994. The Fed in July followed with an additional .75 basis point increase.
The cumulative effect of these moves increased mortgage rates and borrowing costs for homebuyers. At the end of 2021, the average 30-year fixed-rate mortgage hovered around 3%. By late August, it was at 5.13%, up more than 2.6 percentage points from a year before, according to Freddie Mac.
Desmond Lachman, a senior fellow at the American Enterprise Institute, told the Washington Examiner that the rising mortgage rates are already starting to crack the economy. Lachman pointed out that new home sales in July plummeted from the month before, dropping a massive 12.6% last month to a seasonally adjusted annual rate of 511,000 — the lowest level since January 2016.
“Housing is going to lead,” Lachman said of how the recessionary wave could play out. “Housing is already in recession. People argue whether the economy is in recession or not, but everybody is accepting that housing is already in recession. So that’s what leads it. Because what it does is spools out from an industry like housing.”
When builders stop putting up new homes, they will feel the immediate effects of the downturn by getting laid off. That, in turn, triggers a ripple effect on other industries, such as restaurants. Workers, and laid-off former employees, are likely to cook at home rather than spend more dining out.
Also likely to be hard-hit during a recession are luxury items, such as jewelry, high-end clothing, purses, and accessories. While the wealthiest can continue to purchase the goods, many of those in the middle class who might have splurged and bought a new watch during normal economic conditions may decide to hold off on the purchase given the economic uncertainty.
Automobile sales also may take a hit in a recession because consumers who might be ready to replace their car instead hold off while waiting out the economic downturn. They might opt to settle for basic repairs on an aging car rather than trading it in for a new ride.
In terms of jobs, some industries will take a walloping during a recession. The leisure and hospitality industry — including spas, hotels, and amusement parks — are more inclined to shed workers during a recession because they all involve nonessential spending. When people are out of work or have less money, they are far less likely to splurge on a vacation and may put a family trip, say to Disney World, on pause for another year.
Higher-end restaurants will also feel the pinch. For example, steakhouses might see declining popularity as people flock to cheaper options. The changes are already being seen with meat prices. Uncooked steak, which traditionally is a meat that consumers tend to splurge on, fell 1.5% on an annualized basis in July. Compare that to cheaper ground beef, which is up nearly 10% in that same period.
Industries That Withstand an Economic Storm
A recession, though, may not hit all industries equally, with some even thriving during a downturn.
Those likely to lose the fewest jobs and have the most resiliency produce goods or services that involve essential spending. Healthcare is a prime example. While a consumer might forgo purchasing a new necklace, if that same person becomes ill, he or she is far likelier to spend on medicinal help to heal.
“People are going to get sick; they’re going to have to go to the hospital. That really holds up,” Lachman explained.
Staple goods, too, are always needed, even during the direst of recessions. It would be largely inconceivable to most consumers to cut back on products like toilet paper or soap during a recession, although people might opt for cheaper brands instead of higher-end products. That is why companies like Procter & Gamble, Pfizer, and Johnson & Johnson would be expected to hold up so well.
While high-end restaurants might be forced to lay off workers during the throes of a recession, many consumers will flock to the cheapest food establishments instead. For instance, fast-food chains like McDonald’s might see a boost because of the influx of people trying to buy food for cheap.
Lachman said gains might also be experienced because of changing shopping habits during a recession. For instance, if someone normally shops at Target, he or she might decide to turn to cheaper retailers like Dollar General to purchase certain home goods.
Another industry that may prove resilient during a recession is the home goods and home improvement industry. Places like Home Depot will likely keep steady because instead of putting crumbling homes on the market, people might try to hold on until the housing situation improves to sell. Thus, home repairs would be necessary.
During the Great Recession of 2008-09, alcohol sales also remained resilient, despite being a nonessential good. A Gallup poll from 2010 found that during the recession, more people reported imbibing than at any time since 1985. Still, the dynamics of drinking might change during a recession. For example, bars, which tack on a premium for alcoholic beverages, might see declines, while liquor consumption at home could rise.
While most commodities will decline during a recession (the caveat being supply chain constraints or the Russian war in Ukraine affecting supply), gold tends to do well when the economic situation deteriorates. That is because, historically, investors tend to flock to the precious metal as a good store of value, as traditional stocks do poorly. Gold effectively becomes a fear index under dire economic circumstances.
