Recently, talks about recession have increased. We see the warning signs on the news. To name just a few: the stock market is down, inflation is up, and gas prices are at record highs. Supply chain issues are increasing demand, even for basic necessities, which is driving up prices even higher. And many people still cannot find a PlayStation 5.
And as people go back to the prepandemic normal, there will be less money for them to spend since stimulus payments and several moratoriums have ended or will end in the near future.
But probably the worst part about a recession — or even the credible threat of a recession — is the psychological effect on businesses and consumers. Consumers will be more careful about spending, and businesses will be more careful about hiring. And some businesses may even close permanently. You might have heard the news that some major companies have frozen hiring. The most famous remark came from Elon Musk when he announced that Tesla should freeze hiring and cut staff by 10%. However, he later clarified his remarks by stating that only the number of salaried workers will remain flat.
So all of this could mean that economic activity will eventually decrease, resulting in a recession. But even if that is the case, is this something people should worry about?
It is worth noting that if a recession does come, the government is doing it deliberately, but reluctantly, to fight inflation and rising prices. This is unlike previous recessions that were caused by one or several outside events, such as the tech bubble burst in 2000 and the foreclosure crisis in 2008. What this means is that if a recession does come, it will be somewhat controlled. Also, the government will be in a better position to make corrections in fiscal policy if the economy falls too quickly.
Also, many people will have to adjust their spending habits as pandemic moratoriums are ending. The end of foreclosure and eviction moratoriums may mean that some people will have to move to cheaper locations. And people will have to start student loan repayments again. So, in time, people will have less discretionary funds to spend. As these people adjust their finances, businesses will also have to react to these adjustments.
The main way the government is fighting inflation is by raising interest rates, which will make borrowing more expensive. Banks may offer higher interest rates to incentivize people to put money into CDs instead of into the stock market, NFTs, or sports cars. Ideally, the government wants a slowdown in economic growth without a recession. But a recession might be necessary in order to keep inflation in check.
The people most in danger in a recession are those who are living paycheck to paycheck. If they are benefiting from a payment moratorium, its reinstatement could put their monthly spending budget in the negative. It is unfortunate that some people have grown dependent on these moratoriums hoping that the government will make them permanent. Unless these people make adjustments soon, they will be in for a rude awakening.
How will lawyers be affected? Some, such as bankruptcy attorneys or attorneys representing landlords and tenants in the eventual rise in eviction and unlawful detainer cases, will benefit. But consumers are less likely to reach out to an attorney and only as a last resort. And it would not be surprising if the consumers are more price sensitive. Lawyers should expect more haggling on price and possibly more demanding customers.
Lawyers who own their practices should take steps to prepare for a recession. I wrote about this a few years ago where I recommended doing things like having a line of credit, restructuring bills, and collecting on accounts receivable.
So, in the future, an economic slowdown will be coming due to moratoriums ending and government actions designed to fight inflation. It may even turn into a recession. However, I do not think this will result in mass layoffs and high unemployment. While it may not be as dramatic as previous recessions, those who don’t save are most in danger. Consumers are likely to spend less, and law firm owners should look into trimming the fat wherever possible.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
