How to Deal with Economic Uncertainty
We’re living in unpredictable times. Since the start of the year:
- 30-year mortgage rates have nearly doubled to 5.51 percent
- The Dow Jones Industrial Average has dropped almost 10 percent
- The average price of a gallon of gas is up 62 percent since last year
So much economic and financial uncertainty can cause a lot of anxiety. I ought to know because my job depends on how well I can predict where the US economy and financial markets are headed. I’ve seen good times and I’ve seen chaos in my 25 years as an economist. In my role, I provide forecasts to help consumers and businesses make informed decisions about how to spend their money and how to protect it.
If you can try and think like an economist, then times like these may feel less stressful, and you can avoid the extremes of paralysis and knee-jerk overreactions that often end up being mistakes.
Here are the three economic principles that anchor my thinking when the road gets rocky:
Business and financial cycles are a normal part of our economy.
While the economy and financial markets often have dramatic ups and downs, those economic and financial conditions don’t last forever. The economy and markets correct and reset, laying the groundwork for the next cycle of expansion and wealth creation.
While conditions may seem bleak in the short run, in the longer run, those conditions are often just minor bumps in the road toward better days. Remembering that often helps me keep my eye on the road ahead, rather than dwell on the latest negative headline sweeping across my screen.
Keep to a budget that takes inflation into account.
You can’t control a volatile stock market, but you can control your household budget. Be aware of the money you have coming in and where you are spending it each month. In times of high inflation, like today, it is important to factor in an assumption that your expenses will likely be rising a bit every month even if you don’t make any unusual purchases. This will help you avoid any unexpected and serious financial surprises in the future.
Be more conservative than ever about new debt.
With inflation rising, it is easy to just keep increasing your credit card balances, but that can put you on a path to financial ruin, if sustained. Rising car prices have already forced more people to take out bigger car loans too. Uncertain economic times and the ongoing pandemic can mean unexpected layoffs, wealth declines, or even medical emergencies. All can lead to missed payments and even bankruptcy.
Want more thoughts on the economy? Check out my Explain It Like I’m 5 video series. Economics made simple.
And keep updated on my latest economic forecasts and analysis with my US Outlook.