Why there could be a recession—and how we should prepare for it

[UNITED STATES] The U.S. economy has historically proceeded through regular cycles of expansion and decline, having "experienced 34 recessions since 1857." Since the end of World War II, the United States has seen 12 recessions, with a "average of one every 6.5 years." Recent surveys underscore the fragility of household finances, with Bankrate's 2025 Emergency Savings Report revealing that 59% of Americans couldn’t cover a $1,000 emergency expense using savings, while 27% have no emergency fund at all—the highest level since 2020. Concurrently, Fidelity’s research shows 79% of respondents plan to prioritize building emergency savings in 2025, though inflationary pressures continue to strain budgets.

Some financial analysts, according to a U.S. News & World Report article, "anticipate a soft landing for the US economy" in 2025. However, divergent views persist: Expana Markets warns of a "deep global recession" potentially starting in spring 2025, citing inverted yield curves and geopolitical disruptions as catalysts, while J.P. Morgan Research pegs the probability of a U.S. recession by late 2025 at 45%. Even if the country avoids a recession this year, its existing economic situation suggests that one may occur in the coming years.

For years, government stimulus and money creation have driven long-term economic development in the United States. But this is not sustainable. Our debt-to-GDP ratio, for example, has reached catastrophic proportions. According to US government figures, it "surpassed 100% in 2013, when both debt and GDP were approximately 16.7 trillion." By 2024, it had risen to 123%. In 2024, our gross national debt will exceed $34 trillion. In Fiscal Year 2024, we had a $1.83 trillion deficit. The International Monetary Fund highlights that higher debt servicing costs amid rising interest rates could divert 20% of federal revenues toward interest payments by 2028, crowding out critical public investments.

When the debt-to-GDP ratio is high, the federal government must dedicate more income to interest payments. As interest rates rise, these payments grow, forcing the government to borrow more money simply to repay existing debt. Due to the perceived danger, investors may demand higher returns on government bonds, raising the government's borrowing expenses even more. When government bond rates rise, private-sector lending rates typically follow pace. As borrowing costs rise and consumers cut back on spending, the country risks entering a recession. Depending on the severity of the debt situation, a recession may turn into a depression.

Businesses are already adapting to these headwinds. Case studies from Australia’s Business Queensland show companies diversifying revenue streams—such as fashion retailers adding repair services or affordable product lines—to hedge against demand shocks. Similarly, SMEs in Malaysia are advised to audit expenses, renegotiate supplier contracts, and explore digital tools to improve operational efficiency. For employees, the precarious landscape demands proactive measures. Fidelity’s 2025 guidelines emphasize "stress-testing budgets" and exploring side hustles, with 43% of Americans resolving to reduce discretionary spending.

Addressing the US's Economic Challenges

Many Americans understand that the national debt is an issue. According to a poll of 1,000 voters done by John Zogby Strategies, "74% are alarmed by the growing debt, exacerbated by rising interest rates and mounting deficits." Additionally, "74% worry that a potential default could lead to a severe recession." Despite this awareness, systemic solutions remain elusive. A WalletHub survey found 65% of Americans feel their savings aren’t keeping pace with inflation, while 64% have curtailed spending amid elevated rates55.

However, initiatives that can assist the United States reduce its debt-to-GDP ratio and deficit, such as tax increases and spending cuts, are unpopular. Consider Gallup's April 2024 survey, which found that "56% of Americans say their federal taxes are 'too high.'" While less than 60% (the response Gallup received in 2023), it still exceeds the majority. Furthermore, a Pew Research Centre survey from 2023 found that most Americans "say they pay more than their fair share in taxes." While there is strong support for raising taxes on incomes above $400,000, as indicated in the Pew Research Centre study, this step alone would not be sufficient to significantly reduce the nation's debt-to-GDP or deficit.

How Can We Protect Ourselves

Unfortunately, many Americans aren't prepared to withstand a recession or depression. According to Bankrate's 2025 emergency savings study, 89% of adults in the United States "say they would need at least three months of expenses saved in order to feel comfortable." Still, "as of May 2024 polling, 27 percent of U.S. adults have no emergency savings at all." That's troubling. Goldman Sachs recommends households prioritize "liquid savings and low-cost index funds," noting that passive income streams—like dividend stocks or rental properties—can provide resilience during market downturns.

In my opinion, everyone should brace themselves for impact. The advice I previously gave on how to prepare for a debt crisis also applies to navigating a recession—or even a depression. Saving more money and diversifying income sources, such as through passive income from real estate, high-quality dividend equities, and low-cost index funds, are what I believe are critical. Reduce unnecessary expenses and avoid becoming reliant on a single source of income. Morgan Stanley’s 2025 outlook adds that "maintaining a long-term investment focus" and tackling high-interest debt are critical to weathering volatility.

If you own a business, it is more than simply your livelihood at stake. If your company closes, your employees may suffer. Examine your existing expenses and see what you can cut. For example, if you're currently paying for two software solutions that essentially do the same thing, consider removing one. Ansarada’s recession playbook advises businesses to "audit fixed costs, renegotiate leases, and protect cash flow through staggered client payments".

Finally, the time to save and diversify is now. The more savings and income you have, the better your financial position will be in the case of a recession or depression. As the Federal Reserve maintains restrictive rates, experts urge households to lock in high-yield savings accounts or CDs offering above 5% APY—a rare silver lining in today’s economic climate.