A “Richcession” May Be Ahead

Wall Street Journal reporter Justin Lahart has coined the term “richcession” to explain what might happen should a recession occur this year. According to him, the well-heeled would take a bigger hit than usual, even if we manage to narrowly escape an economic downturn.

But “it should be shallow,” says University of Maryland Robert H. Smith School of Business finance professor and former Assistant U.S. Treasury Department Secretary Mike Faulkender. “The question we have going into this one is who’s going to be hit? So yes, we’re going to have a pullback, but pullbacks are not uniform across the income distribution. Depending upon whom it hits that’s indicative of how deep this recession is going to be.” 

As the Journal article shows, for poorer people the years since the Covid-19 crisis hit have been somewhat easier financially than the years before it. That’s thanks to several government stimulus payments and a tight job market that’s led to higher, competitive wages. However, Faulkender says those households are now spending down the money they saved up in stimulus payments, ”which is not a surprise because that’s why we’ve got so much inflation. We threw a bunch of money at households, but you didn’t see this commensurate increase in output.” 

Now, “you’ve got more money chasing similar amounts of goods and services and that’s going to create price increases. So, we’re starting to see households pull back.” Retail sales fell 0.7% in November and 1% in December. “Consumers are pulling back in significant numbers,” says Faulkender, “that would normally lead to a reduction in aggregate output, hence a recession.” 

Meantime, many high-income earners are being laid off by the tens of thousands in the tech industry and the stock market hasn’t been kind to the rich either. 

The market was down 20% last year and U.S. stocks have fallen short of their global peers over the past three months. Some analysts think the problem will persist and grow worse as 2023 progresses, but the wealthy normally have a significant amount of money put away for a rainy day. “A high-income person, if they have a temporary income shock, they’ve got reserves that they can call on to maintain the lifestyle. Low-income people don’t have those.”

That’s why Faulkender is predicting a mild recession, especially if it falls heaviest on the rich. 

Surely time will tell.