"Richcession" Road - Who Is Most At Risk?
The rich will suffer more than the poor if a recession hits the U.S.. At least, that’s what the Wall Street Journal recently said.
They coined the term “richcession” to explain the phenomenon of the wealthier Americans being the most vulnerable during times of economic hardship, despite the mainstream consensus that it is lower-income Americans who suffer the brunt of a recession. Another article by The Washington Post published at the end of December 2022 claimed that “white-collar workers bear the brunt of a downturn.”
Disagreement among economists and journalists is nothing new. Most economists can’t even agree if there’s even a recession coming or not. However, most do believe that economic growth will see a massive slowdown in the coming year.
It’s hard to miss the headlines pronouncing the widespread layoffs in the tech industry. This only reinforces the argument that it is white collar workers who get the worse of a slowing economy. According to the Washington Post, over 80,000 employees in the tech industry lost their jobs by the end of November. This didn’t even include the Amazon bombshell that the tech giant also planned to lay off 18,000 workers in 2023.
These companies are known to offer generous compensation to employees. Meta has a median annual salary of $295,785. Twitter’s median annual salary is $232,626. These are about five times more than the U.S.. median annual salary. Both of these companies have announced layoffs coming later this year.
So, are wealthy Americans in for some rough waters in the near future?
Stocks Are Not Hot
Another factor impacting wealthy Americans is the current state of the stock market. Wall Street saw its worst year since 2008, as the S&P 500 went through a 20% decline. Tech companies, unsurprisingly, were among the heaviest hit stocks on the index.
Wealthy people still own a majority of stocks, according to Martial Dupaigne, an economist. So, it makes sense why the current state of the stock market is bad news for wealthy American investors. Many investors face heavy losses if the stock market doesn’t recover and return to the highs we saw during the COVID pandemic.
This is a testament to why real estate has been a cornerstone of the portfolios of the wealthiest Americans for generations. It offers stability and reliability that cannot be found in stocks.
What About Lower-Income Workers?
This might be a surprise for some, but lower-income earners have a relatively favorable economic outlook. The labor market is still looking for people to work.
While big tech companies have a surplus of applicants, companies who are searching to fill lower-paying jobs are struggling to find staff. For example, the hospitality industry is seeing a 2 million staff shortage. This suggests that low-income workers don’t have to worry about job security, unlike their high-income counterparts.
Since the end of 2021, lower-income households’ incomes have increased by 7% according to the Federal Reserve.
Richsession- Short or Long Lived?
The looming recession is expected to be different from any other as a result of the factors explained above.
Although other non-tech giants like Goldman Sachs have announced big layoffs, economists say it’s still too early to tell what this trend means for white-collar workers.
It’s also important to note that wealthy people aren’t the only ones with stocks. Pension funds like 401k’s are also connected to the stock market, so a crash would impact the retirement savings of many middle-income Americans.
The interest rate hikes we’ve seen in recent years to fight rising inflation in the U.S. is likely to negatively impact lower income households the most. So, while middle managers and senior executives might be experiencing the worst of it for now, if previous recessions are any indication, there will be a domino effect that will eventually reach lower-income Americans. This is what happened in 2008, which hit the wealthy first.
However, the Wall Street Journal article isn’t as relevant for wealthy Americans whose income mainly comes from investments such as real estate. Real estate, particularly multifamily, tends to perform well during times of economic hardship. As cliche as it is to say, it remains true that everyone needs a place to live, regardless of how the economy is performing.
How Real Estate Can Help
Due to the reasons mentioned above, there’s never been a more important time to take steps to preserve your wealth. Making decisions when things are bad will only lead to rushed, irrational action. Being proactive, rather than reactive, is what savvy investors do best.