The state of the American economy is becoming bleaker as days go by. With inflation pushing up the price of consumer goods and the recession looming forward, it’s only a matter of months before we feel the entire brunt of it. But, more than half of Americans don’t have savings to cover an unexpected $1,000 expense, which means many Americans will be unable to weather a financial storm without taking on debt or cutting back on spending. That’s why we’re seeing so many stories about people cutting back on spending and saving as much as possible before the recession hits.
This worry over personal finances has led to significant changes in consumer spending habits. From skipping vacations to cutting back on dining out, many Americans have dramatically altered their spending habits during the recession.
And now there’s a new threat on the horizon: rising interest rates. So how will consumers respond when they start to feel it? Let’s find out.
The Psychology of Recession
The first thing we need to understand about the recession is that it isn’t just a financial phenomenon — it’s also a psychological one.
Our spending habits are closely tied to our emotions. We spend more when we feel good and less when we don’t. This phenomenon is the ‘recession psychology’, and it’s imperative to understand how consumers will manage their money once the recession ends.
We’re already pretty aware of how the Great Depression lasted for years and had long-term effects on our economy and culture. In fact, many experts say we’re already in another recession right now, with 56% of Americans thinking the country is already in a recession and 80% concerned about the impact a recession could have on their daily finances.
One of the most integral psychology that we can recognize commonly during the recession is the fear factor.
When people are scared by economic news and forecasts, they tend to hold onto their money more tightly and stop spending as much as they normally would. This means that when the economy starts to improve, people won’t be spending their cash as quickly as they normally would. As a result, companies might see slower sales and profits during this transition period.
The Changing Patterns in Consumer Spending
The recession has pushed many people to rethink how they spend their money and how they can save more. The recession has also forced consumers to look closely at the products they buy and their shopping habits.
Many people are also taking a hard look at their personal finances and deciding whether or not they can afford some of the things they’ve been doing for years. In fact, 30% of people have started purchasing less, while 28% purchase consciously with the threat of recession.
During such financially unstable times, consumers are prioritizing spending on the following, according to a recent survey conducted by HubSpot:
• Essential Groceries and Food (55%)
• Essential Products and Hygiene (38%)
• Rent, Mortgage, and Housing Bills (34%)
Consumers are cutting down on expenses like vacations and entertainment because they’re paying down their debts or saving for retirement. The economy hasn’t bottomed out yet either — if it does, we’ll see even less consumer spending as people try to save up even more than ever before just to meet their basic expenses.
The Debt Repayment Crisis
The recession is a time of economic uncertainty, and people are often concerned about their ability to make ends meet. As Americans struggle to pay their bills, several are also facing an unprecedented debt crisis.
Many people have lost their jobs and are struggling to pay their bills. Others are tightening their belts and trying not to spend more than they can afford. This has led to a dramatic decrease in consumer spending, which makes sense given the state of the economy.
The same happened during the previous recession when people could not afford necessities like food, clothing and shelter. As a result, they had no choice but to use credit cards or borrow money just so they could buy basic necessities.
Unfortunately, many people who used credit cards during previous recessions found that paying off those debts was almost impossible once they lost their jobs. They had no way of paying off their credit card bills other than by defaulting them.
This is why many consumers have become more conservative with their spending right now — before the full force of the recession hits — and are focusing on paying off mortgages and bills. While this is a wise move, the recent hike in the interest rate by the Federal Reserve can likely result in higher interest rates for mortgages, credit cards, and loans. This could significantly impact the spending power of the consumers and their ability to manage their expenses in a recession without falling behind payments and getting into debt.
Managing Debt with Recession Looming Ahead
Consumers who have taken on debt earlier might struggle to pay off their debts. Those who do not want to fall behind with payments or default on their loans should consider at least meeting the minimum payment to manage their debts during a recession. It’s advisable to pay off a good chunk of the debt with a high-interest rate first while making a minimum payment on the other debts.
However, due to the hike in interest rates, some consumers may see an increase in the minimum payment amount of particular loans, especially in unsecured debt like
credit cards. This can make the monthly payments more expensive and further burden those already struggling financially.
If that happens, consumers can talk to the lenders about lowering the interest rates, debt consolidation options or any other feasible repayment plan that’s affordable and comfortable.
At Capital Recovery, we work alongside lenders and debtors to mediate a favorable debt repayment option that’s realistic and achievable. Our team helps debtors to manage their finances while prioritizing paying off their debts and, in turn, helps lenders register a high recovery rate.