Are We Headed For A ‘Richcession?’ Why The Wealthy Stand To Lose The Most If The Economy Stalls

Key Takeaways

• Recessions generally have an outsized impact on working and middle-class workers.
• The tight job market could protect lower-wage employees from potential layoffs during a recession.
• The wealthy could see a bigger hit to their wallets if a recession happens in 2023.

You’ve heard of a recession. But have you heard of a richcession? As the name suggests, this is a type of recession that impacts the wealthy in a big way. With the economy flashing warning signs, we might be heading for a richcession sometime this year.

Let’s explore what a richcession could mean for the wealthiest, and why we’re wondering if it could happen in 2023.

What is a Richcession?

According to the National Bureau of Economic Research, the U.S. economy isn’t in a recession. The last recession to be declared by the NBER was in early 2020, at the beginning of the pandemic. But fears of a recession have been floating around the economy for months.

If the U.S. heads for a recession in 2023, it’s possible we’ll see what’s sometimes called a richcession. Instead of mostly impacting the working and middle-class, a richcession would have a more noticeable effect on the finances of the upper class.

How a Richcession Would Impact the Rich

When a recession is on the horizon, the rich usually don’t have to worry too much. They’re usually in a good position to ride out the rough economic times, the last to be affected and the first to recover value. But in the case of a richcession, wealthy Americans could feel a unique pinch on their budgets.

Here are two reasons why the wealthiest could stand to lose more than usual during a potential richcession:

White-Collar Layoffs

In 2022, over 1,000 tech companies laid off workers, many high earners. The total number of laid-off employees by the end of the year was estimated by the website Layoffs.fyi to be over 150,000. In many cases, the tech workers laid off were white-collar workers with higher paychecks.

As more tech companies lay off workers in 2023, money could get tighter for the rich, many of whom are being pushed out of high-paying jobs. The caveat here is that, generally, higher-income workers have more transferable skills that can help them find another high-paying job. Still, when put in the context of a widely understaffed job market, the amount of layoffs for white-collar workers is noteworthy.

Stock Market Tumbles

The household net worth of the rich typically includes a healthy investment portfolio. Since many investors choose to have at least a portion of their net worth in the stock market, plummeting stock prices are bound to have an impact on the rich.

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 a large financial base might see their net worths plummet.

When combined with the increase in layoffs, a major stock market hit could leave wealthier people in a more precarious situation than past recessions.

How a Recession Would Impact Everyone Else

If a recession strikes, the impact likely won’t be limited to those with thick wallets. A recession can impact everyone across the economic ladder.

Here’s how a recession could impact the poor and middle-class:

High Inflation

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

Inflation impacts everyone. Higher inflation means that it’s getting more expensive to purchase what you need. For example, you might have noticed higher prices at the grocery store. Many household budgets are feeling the pinch of these higher prices.

Higher Interest Rates

With inflation still hot, the Federal Reserve has been steadily raising the federal funds rate. As interest rates rise, it gets more expensive to borrow. For example, interest rates for mortgages and new car loans have shot up significantly.

Since many households rely on loans to make major purchases, like buying a home or vehicle, higher interest rates have an impact on people of every economic status. If you are in the market for a new home or vehicle, you could get stuck paying much more in interest than you would have this time last year.

Saving Grace: A Tight Job Market

Luckily, there is good news for those holding down jobs in the service industry. Some industries, like leisure and hospitality, are still struggling to staff up to their pre-pandemic levels. With that in mind, it seems unlikely that workers in these fields will lose their jobs during a recession.

For example, the number of jobs at places like restaurants and bars rose by 62,000 in November of 2022. But that’s still 980,000 fewer jobs than leisure and hospitality’s pre-pandemic level. If you’ve gone out to eat lately, you might have noticed that many restaurants are short-staffed. With that, workers in these positions should hopefully be able to continue earning a paycheck even in tough economic times.

How to Prepare for a Recession

If a recession hits, it won’t be a fun experience for anyone. But regardless of where you stand in the food chain, there are some strategies you can employ to prepare your household for a recession:

• Build an emergency fund: You never know what life will throw your way. If possible, build up three to six months’ worth of expenses in an emergency fund. But even if you can only save $100, that small buffer is better than nothing.
• Cut back on discretionary purchases: A recession often means belt-tightening for everyone. If you can, start cutting unnecessary expenses out of your budget. Not only will this help you build up savings now, but it will also help you avoid 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 hunt.

Bottom Line

A coming richcession might hurt the rich more than others, and more than usual. But a recession of any kind will likely impact households across the financial spectrum. If you are worried about a potential recession, now is the time to beef up your savings. Extra savings will give you more breathing room to recover after a job loss, regardless of your net worth.

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

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