Zacks Investment Management

Quincy P. from Pueblo, CO asks: Hi Mitch, I’ve been hearing the term “richcession” lately, which I think is in reference to an economic downturn that mostly affects the affluent. Is this correct, and if so, what does it mean is happening in the economy exactly?

Mitch’s Response:

Thanks for emailing your question. I have indeed heard the term “richcession” recently, though I’m not entirely convinced it’s an appropriate description for the U.S. economy today.¹

Generally speaking, recessions impact just about everyone in the economy. But usually, it’s the lower and middle class that are hit the hardest, since job losses tend to be concentrated within this segment, and since there are typically lower levels of savings to dip into.   

A much different scenario appears to be playing out today. By some estimates, 50% of all layoffs announced to date have come from technology companies, which tend to pay high salaries and offer attractive benefits. Meanwhile, jobs in leisure and hospitality have yet to recover from the pandemic, and the Labor Department recently reported that there are at least a million more unfilled jobs in the sector than in pre-pandemic.

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This dynamic is what “richcession” is attempting to describe. It’s a scenario where white-collar workers are experiencing layoffs and wages that are not rising in tandem with inflation, while blue-collar workers in areas like hospitality, travel, and retail have many jobs to choose from and have been experiencing robust wage growth. Add in the fact that lower- and middle-class families received a large fiscal stimulus boost from the pandemic, and the economy looks like one where lower-income people are doing well while upper-income folks are not experiencing the same kind of tailwinds.

Besides wage growth and layoffs, the other explanation given for the “richcession” is that the stock and real estate markets have both experienced significant declines over the past year, and that’s where many middle- and upper-class households hold wealth. The stock market, as measured by the S&P 500, fell -18% in 2022 and existing home sales have fallen by over 35% year-over-year (in January). The chart below shows how home prices have fallen from summer 2022 peaks.

While these factors do seem to back up the “richcession” claim, I’m not buying into it for two key reasons. The first is that there does not seem to be an acknowledgment that people are being laid off at technology and other companies are having very few issues finding a new job quickly. It may not pay as much – which is another argument for a “richcession” – but I’m not convinced they’re feeling a level of pain synonymous with an economic downturn.

The second reason is that even with the stock and real estate market declines of 2022, there were still historic returns booked in the years leading up to it, such that the retreat is coming off of very high levels. Overall household net worth in the U.S. spiked in the two years following the pandemic, and has only slightly retreated from those peaks. 

There is no way to know exactly when or if a recession will occur, but you can prepare for one.

It’s important to understand how recessions work, how long they last, and how to potentially protect yourself and your family from long-term damage to your assets and security. We can help you with our free guide, A Recession is Coming: 6 Insights to Know Now So You’re Prepared.⁴

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Disclosure