Ep 478: Recession Watch: What the Moody’s Downgrade Really Means for Your Money
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in 2025, there are a lot of ups and downs. And what's most important is that you have a mix in your portfolio that can help you basically not have the same extremes and can help you from really jumping out because individuals don't tend to have the best

the best judgment. I mean, remember the market is all of the individuals together and none of us are necessarily going to get exactly the right timing for when to sell and when to buy again. So it's an important moment for us to kind of keep our eyes on our own balls and to make sure that our portfolios are fully invested and appropriately aligned to what we're trying to do.

Hey, everyone. Thanks so much for joining us today on Her Money. I'm Jean Chatzky. And maybe you'll remember that back in March, we dropped this episode with Catherine Edwards asking the million-dollar question, are we headed into a recession? And here we are, a few months later, asking her.

Well, we're asking the exact same thing. But lately, the chatter has just gotten louder. A few weeks ago, credit rating giant Moody's downgraded U.S. debt. Suddenly, we're all wondering, what does this mean for me? Because...

After all, isn't that the thing? What does this mean for my money? And because it wouldn't be an economic conversation in 2025 without a little flavor, we've got wacky recession indicators popping up too. Apparently, when Lady Gaga drops a new album or we see a surge in lipstick sales, even

banana prices, believe it or not, might mean something. So what's noise? And what do you actually need to pay attention to?

Katie Klingensmith has answers. She is the chief investment strategist at Edelman Financial Engines, where she leverages her experience as an economist to bring insight to clients. I had the pleasure of meeting Katie at an Edelman event recently, and I knew instantly we were going to have to get her on the show. She is here to help us decode the big headlines and give us a game plan for what to do with our money right now. We're going to take a

quick break.

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An extra 25 cents for every gallon on your first tank of gas using promo code HERMONEY. We are back. We're talking with Katie Klingensmith of Edelman Financial Engines. Hey, Katie, thanks for doing this. Oh, it's so fun to be here, Jean. Great to see you. Before we dive into these economic tumbleweeds, Katie,

Tell us a little bit about you and your background and how you ended up in this place where in plain English, you help people understand the economy. - I love that. Sure, so I started out, gosh, it's been a while now, but early in my career, really thinking that I wanted to be academic. And I love to learn, I love to study,

I really, and I think also just growing up with a blue collar background and then going to very academic institutions, I found that I could do that, that I was good in the classroom and it was fun for me. So no, I got started on this career early on very much being an analyst. I initially studied history and economics and thought that I would go into a university and be a professor.

But what I learned about myself pretty early on was what I really like to do is learn things and then explain them. I'm much more interested in history and economics and political science and sociology and all of that. But then thinking about how that actually plays out for people, how it plays out for me, how you see it in the day-to-day. So through a series of earlier stops in my career where I really was more of an analyst, I was constantly being pulled into these roles where I was doing talking,

Okay, well, you know, I like to teach, but I actually like to teach in a very practical way. I like to think about how this evolving world matters to people. And I also, I'm particularly happy to be in this conversation with you today because I think that there's been a particular space for female voices, perhaps because there's been so little space taken by them historically. And so many people, well, with money are women. And as you

you know and explore here that's becoming all the more pronounced. So I think that in particular, being able to reach a broader range of people with these messages around what it all means has been a happy play to my strengths. So I just joined Edelman Financial Engines a few months ago, and I've spent two of decades, the last two decades at two different big investment organizations

In different roles, but always in some ways being this bridge between the really analytical folks, understanding what's going on in the economy, understanding what that means for investments, and I being part of that for my training and interest and hopefully skills, but then being tapped to explain what that meant to clients in the public.

I love that. And it's something that we just need right now. Let's start with this Moody's downgrade, which made a lot of headlines in part because people said, yeah, been there, done that. But in part because people said this is meaningful. So where do you sit? What does this actually mean to consumers and investors? Well, I mean, as a trained economist, I always have to start with on the one hand and then on the other. In the end, I see nothing. On the one hand, I'm

It means very little because there are three big rating agencies and the other two downgraded the U.S. a long time ago. There wasn't a new piece of information that caused Moody's to make this move, this downgrade. So it doesn't really matter. And just as a reminder, the rating agencies, there are different ones in different spaces, but there are three big ones for big debt issuers like the U.S. government when they borrow money.

There's Moody's, there's S&P Global, and there's Fitch. What the reading agencies do is that they look at the U.S. government, other governments and entities, companies, and say, when they ask to borrow money, how likely are they to return that money? How likely, if you as a borrower lend the money, are you going to get your money back? The U.S. government has always been seen as the gold standard, to use an economics term, but the entity most likely to pay back.

I don't really think that's changed, Jean. But Moody's adding their warning that the U.S. government was no longer considered perfect. It's not new information. But on that other hand, it does matter because now all three rating agencies are telling us the U.S. government isn't perfect. There really are these long-term concerns.

around how much debt the U.S. government has already taken on and that there could actually be a little hint of risk of how predictable the U.S. government, how reliable the U.S. government might be paying it back over the long term. When we talk about the U.S. debt or the deficit, we've got this big, beautiful bill that came out of the White House that passed the House that, as we tape this, is now being repaid.

Talked about in the Senate. It'll be shaped. It'll go back and forth and one of the things that this is

will do if it goes forward in its current form is give the United States a bigger debt load is is increase the amount of The deficit now that is not something that is just happening under this administration This is something that's been happening for years. You have to go all the way back to President Clinton to get to a point at which we had a balanced budget but

I know there are some economists who believe it doesn't matter, the deficit, and there are some economists who believe it really does matter. Can you tell us where you sit and if it does matter, how does it matter?

Sure. So as you say, Dean, we don't know what's going to be in this budget and tax bill yet. There's so much negotiating. I know our tax experts within Edelman Financial Engines are telling us, just don't count on anything yet. So we'll see. But one thing I would note within your question, we've actually been running the size of deficits

that's projected from the current House bill, we've been running that magnitude of overspending the last two years. And I note that because, I mean, we all have our political views right now, but this is actually something that's been happening across different constellations of who's running Washington. It's so much easier to spend money. I mean, if you're looking for a deal with somebody, why not just spend a little more than make cuts?

historically, we've run deficits for a long time, but mostly we've run big deficits when the economy is doing poorly. It's this idea called Keynesian economics. It

It's kind of simple. It basically is that when things are going badly in the economy, for whatever reason, maybe it's COVID, maybe it's some other shock or recession or interest rates, what have you, the government's going to spend extra money, including maybe money they have to borrow, to basically just stimulate the economy, make the economy move, give people more money to spend, maybe hire more people to do projects, etc.

And then when the economy is humming along, the government's not going to spend as much money and they'll theoretically be able to save some money. And what we've seen change over the last few years is that the U.S. government is spending way more than they bring in, even when times are good. All right. So does this matter? I am in the camp that it doesn't matter at the margin. The U.S. government gets to spend more money than the rest of us, but it does matter after it hits a certain point. And we don't know what that point is.

It doesn't matter in the sense that the U.S. government is seen as so creditworthy that people structurally want U.S. treasuries as a place to just save their money, basically, and so are willing to lend the U.S. government money because they really don't have to worry about getting it back.

It's like kind of almost like having cash, but they can make a little bit more. And people is not just U.S. people. It's global people, global governments everywhere. So the U.S. government, because it has that special role of issuing the reserve currency and the reserve asset, that place where people park money, basically more people are willing to park money, lend the U.S. government money than they are to invest or to lend money to anybody else. So the U.S. gets to run deficits without a big consequence.

But when the U.S. runs too big of a debt, shall we say accumulated amount of deficits, then we start and we have begun to ask questions around how expensive that's going to be. And is there an infinite amount of folks out there, all different kinds of folks who are willing to park their money with the U.S. government? Or when do they start getting worried that there's so much that they might actually not get the same money back at the end?

When we opened the show, Katie, I was sort of listing some recession indicators, lipstick, bananas. What do all these things have to do with a recession? Remember, recession is a very technical definition of the economy shrinking, but that doesn't get to how we experience the economy. So I think all of those indicators, some are very serious and some are fun, but actually could be good predictors.

They both can speak to how we experience an economy that's doing worse. And some of them can give us insight into the much more quantitative, furious definitions. There is this classic economics example of when people are feeling poorer. I mean, if they are poorer, but they're also worried, they buy, we call them inferior goods. Maybe they buy a lower brand of lipsticks.

or the classic economics example is that they stop buying meat and they buy more potatoes. So when things are bad, people buy more potatoes, at least theoretically. Maybe when things are bad, people go to Sephora less and Walgreens more to buy their lipstick. So there are actually parts of the economy that gain because things are going poorly. But I don't know.

But again, I think in the end, there are different ways to think about our own behavior when we're feeling confident and when we're feeling worried. And you could see how that rolls up into the whole economy. And there's also just the recognition that recession or tough times economically, whatever the definition, mean different things depending on where you sit in the economy. You might be worried about your job, but still have it.

So your life doesn't actually change that much besides your wellness, your anticipation, where other people, your neighbors, your friends might have lost their job and their spending is obviously going to change a lot. The price of bananas, if it goes up, it's supposed to signal greater trouble for the economy. That one I just don't get. Oh.

Oh, it's so funny. I mean, it's just an item that we buy really routinely. So it's interesting to think about like how these different examples can speak to larger patterns. But let me tell you, Jane, bananas are really interesting right now because no place in the U.S. can you buy bananas.

And right now there's all of this discussion about tariff prices, right? Which tariffs are just a tax on anything you buy from another country. But we have to buy bananas from another country. Nowhere in the U.S. can you grow bananas. So suddenly there is this sort of funniness around not just bananas, plenty of things, but bananas is a perfect example because we don't have any choice where we buy them from. And suddenly the price of bananas might go way up, even relative to other fruits, because we're paying this import tax

on imported items. So there's all sorts of things to unpack in that behavior. So as I said at the top of the show, there is a lot of talk about recession.

I know recessions come and go. I know there have been a lot of recessions if you go all the way back to the Great Depression. The economy grows and then the economy stops growing for a little while. Do you think that we are there, headed into a recession, maybe even in a recession? And what are consumers and investors supposed to do with that information?

Absolutely. Okay, so it's interesting to think about what a recession even is. I think really, recession is much more about how we feel about the economy and how we experience it. So it's a little circular. What does a recession mean for you? Well, recession means for you how you feel it. But from an economist perspective, what a recession means is two consecutive quarters of

of contracting GDP. That doesn't mean a lot to people personally. But what that means in plain English is that the overall size of the whole U.S. economy for everybody shrinks for two quarters in a row. And we already saw it shrink

this first quarter of the year. We don't know yet for the second quarter. So we could actually be relatively close to what's called a technical recession. That doesn't necessarily mean that your life is awful. Recessions can take very different forms. So I think that the question is, will we really see

the economy turned down, and when will that be painful? To me, what's much more important about people's lives and how they feel is employment and inflation. So employment really hasn't gone down much. It's still pretty steady. There's very little unemployment in the U.S. Now, if you're unemployed, you feel it very acutely. But from an aggregate perspective, there's still a very high level of employment. And even though there have been

fewer jobs created the last few months, and we have that big data coming out soon, we do still see the overall job health are in reasonably good shape. Inflation, too. There's so much worry right now about inflation picking up, and that matters. It makes people anxious. But so far, prices haven't gone up that much.

So I would say right now, recession anxiety high, but actual recession in terms of us not having jobs or having to pay more for the same things, that hasn't gotten much worse lately. But it really is a source of worry for a lot of Americans. So if you have a job and you're proceeding along a pace that's

Is now an okay time to make a big purchase like a house or a car? Is it a particularly bad time to do that? Are there things where we should be taking precautionary measures so that if the economy turns down, we pay?

individually are not as impacted? Sure. I mean, I have to put it in a plug for my employer here. I think the whole purpose of wealth planning and Edelman Financial Engines is to try to answer that question both from an economics or a portfolio perspective, but always make it personal. And not just because that's nice, but because it matters who you are, what your life situation is.

I would say that right now there's more uncertainty than we often experience. That's a word that's getting used a lot and it's annoying. It sounds like, oh, we don't know. But I actually think it's a very particular word right now. What it means right now is that there have been these big changes in the way the world is working.

We've got big changes with trade policy, potential big changes to tax policy, big changes to the way countries are working together, questions around manufacturing and unemployment or where people and how people are employed and what they're employed. So it's really hard for us, I think, as economists, but also as households to know what the world's going to look like in six months. I think from a

personal perspective when that's the case, it's always, at least to me, emotionally helpful, but also rational to be a little bit more conservative. If you just don't know for sure, you never know for sure, but if you feel less confident that your job will be there for you, paying you bigger bonuses, giving you that opportunity for promotion,

in six months, then you might wanna be a little bit more conservative about maybe having some extra cash or maybe not committing to that big spend. From an investment and economics perspective, I would say that the last six months have been a reminder that things can go way up and way down, or it was the reverse order, way down and way up. It's a hard ride. So you have to make sure that you're really ready for that.

and that you really have all of the investment and the savings for yourself so that you can weather those kinds of ups and downs. But in terms of making big purchases, I think that perhaps you're also asking about interest rates.

And when interest rates go up in the long term, like what we were talking about with the US government, then that can influence when we want to make choices. When it comes to some of those big decisions, the house, the car, we borrow money to do those things, right? And that means interest rates are a big factor in sort of trying to time those decisions if we can time them.

Where do you think we are in the interest rate cycle? So many things impact it.

interest rates. And let's just loop back to what we were talking about with the U.S. government potentially having to pay higher rates for borrowing money. We're not the U.S. government, right? We have to pay more. But really, a lot of our interest rates for the things that you just said, if it's student loans, if it's credit cards, if it's a car, if it's a house, they're based on what the U.S. government pays and what the Fed does. There's a lot of things that influence it. But let me link it to that Moody's downgrade or

worry about the U.S. government for a second. That's mostly about how much the government has to pay when they borrow money for a long time. Nobody's really worried about the U.S. government being able to pay their debt back next year. And those 30-year rates, they're not really rates that most of us feel every day, you know, in a household, except for mortgages. So mortgages are their own thing. They're not exactly what the U.S. government pays. But mortgages, 30-year mortgages tend

tend to more or less reflect what the government has to pay, plus some, on a 10-year basis. So they're pretty linked. So when interest rates are going up for the U.S. government, because everyone's a little teeny bit worried, not a crisis, but a little worried, it means that we might have to pay more when we borrow money to buy a house. And that hurts. It affects how much house we can buy. It certainly is something that's going to play out across a lot of U.S. households.

I would just say that other things drive shorter term interest rates. So if you are thinking about a credit card or if you're thinking about borrowing money for three years to buy a car, there are other influences and the rates are different. That tends to be a little bit more about what's going on with inflation right now and what's going on with growth right now. So interest rates are still a little bit high right now. And we're hearing noises from investors.

the Federal Reserve, that they might cut rates later this year or next year because they want to help the economy. They want rates to be a little lower to keep us from going into a recession or a worse recession. And that would bring those shorter-term interest rates down, which could make for some cheaper rates, lower rates for some near-term purchases, again, like borrowing money to buy a car or something where you're just borrowing money for a year or two or three.

We're going to take a quick break. When we come back, we're going to talk about other things in your life, other financial moves that you may want to make just to prepare yourself for what's coming down the road. Back in a sec.

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world. So one of the things that I follow is the personal savings rate that is tracked by the Federal Reserve in St. Louis. And interestingly, over the past month or so, it's popped from about 4.3% to 4.9%, which sounds like nothing, but is kind of significant when you look at how the personal savings rate moves. Why are we saving more, do you think? And is this a good thing?

savings rates are so interesting. You would think that people would save more when they were happy and had extra money. But in fact, and this is I'm guessing why you think it's interesting, Jane. In fact, people tend to save more when they're nervous. Obviously, you can't save when you're not making money. So it's a particular moment of time. And there was all sorts of interesting analysis about why the savings rate went way up during COVID. That was more because we

we couldn't spend money. We couldn't go out and do the things that we wanted to do. So we stockpiled it because there wasn't as much fun to be had. But generally, the savings rate, when it goes up, it does reflect that there's real anxiety about the economic outlook going forward. You think there's a chance you might lose your job. You think you might have to pay more for your kid's tuition or for your grocery bill or whatever it is. So this rising savings rate is a little bit of a somber indicator, at least about our mood.

When people get nervous, one of the things that I worry about and that I know you worry about is that they're going to do something rash when it comes to their investments. You know, if we look at the historical trends in the market today,

Markets go up over time. They may go up in a very choppy way, but the big mistake that we hear about people making after every single downturn in the market is that they sold out and they didn't get back in. What are you talking to people about now in this time of uncertainty when it comes to dealing with their investments? It's a lot easier to talk about uncertainty

maintaining investments across a whole bunch of different asset classes right now than it was last year. And that's always our advice at Edelman Financial Engines, that you don't just chase one thing and that you don't actively buy and sell depending on the news flow, kind of resist your feelings of fear and greed.

It was much more difficult at the end of 2024 because, well, we were telling our clients, stay the course, keep a mix of investments, think about your long-term plans. A lot of our clients, a lot of people everywhere, like, well, why don't I just have the returns? Why isn't my portfolio looking like the...

basically the U.S. market, especially the big companies in the U.S. We have this spectacular appreciation, this rise in big tech companies in the U.S.,

And, you know, it's hard to tell people, all right, well, you want to have this balanced portfolio and you don't want to go in and like buy the things that are doing well. After the last, I mean, really the first half of 2025, it's easier to remember the long-term history that we just see huge value quantitatively and emotionally in staying the course.

If you had gone into 2025 and suddenly used this word uncertainty and thought about all the fears and worries, and there's plenty for us to talk about, recession risks, tariffs, inflation, and like, oh my gosh, I want to get rid of equities. I want my portfolio to have more cash. I want to be safer. And you went ahead and sold, then you would have lost what was then a market recovery because S&P 500 went up.

almost to what we call a bear market, which is a 20% drop, just barely missed it all the way back. So it's really an important moment to remember that over the long course of history, it looks a lot like what's happened in 2025. There are a lot of ups and downs. And what's most important is that you have a mix in your portfolio that can help you be

basically not have the same extremes and can help you from really jumping out because individuals don't tend to have the best judgment. I mean, remember the market is all of the individuals together and none of us are necessarily going to get exactly the right timing for when to sell and when to buy again. So it's an important moment for us to kind of keep our eyes on our own balls and to make sure that our portfolios are fully invested and appropriately aligned to what we're trying to do with them.

Over the past couple of months, we've seen a lot of talk about sectors that we don't

haven't talked about necessarily in a while. And I'm thinking specifically about international stocks in Europe. Europe has done well. Specifically about gold, we have seen a big move in gold and also in crypto. We've seen crypto come back really strong. Do you believe, and maybe we can take them one by one because I know international stocks are a lot different than gold and crypto. Do you believe there is room for these

in the portfolio of most diversified investors? So we feel strongly that a well-diversified portfolio should have global, it should have equities, it should have bonds, it should have a lot of different types of equities and bonds. Let me start, Jean, with thinking about what's happened with the global equities. We have long had these in our portfolio, and they've been lackluster at best.

And now part of that is because the U.S. has done so well. Technology has been a big theme. So the big tech companies in the United States have driven our economy, have driven our stock markets, have driven the price of the U.S. dollar. So really having more investments in the U.S. doesn't it's not just because we're Americans, but anywhere having more investments in the U.S.,

has been good for us. And we here at Edelman Financial Engines who argue for this diversified portfolio said, remember the things that are losers today could be winners tomorrow. Well, it sure has been an example of that in the international space where, as you said, European equities and global equities in general, especially for the developed countries, have done much better than the U.S. Partly that's because their economies look a little bit less uncertain than the U.S. right now, not as big of policy changes as

And partly for a myriad of reasons, some of which we've already talked about. The U.S. dollar has lost some of its value. It's been really expensive the last few years. So if we own parts of companies' equities in other countries and we own them in those countries' currencies, then we're basically saying we're not only holding U.S. dollars. And when those other currencies do a little better, that also helps. So it's definitely been a year when

the international equities that weren't so great for a while have shown up and really, really outperformed and helped balance the portfolio when most people's portfolios, when it's been buffeted a lot by all these big headlines. As far as golden crypto?

We find gold and crypto to be a more complicated question in portfolios. I'll start with gold. It has long been a question that investors have asked. And I'll tell you that it for a long time has been in portfolios. I mean, a really long time, long before we had electricity, we've had gold in portfolios.

What we struggle with is gold does not earn an interest rate, where when you own cash or you own bonds or even you own equities, you have the potential for them to pay you interest or dividends and to really appreciate over time. And gold doesn't do that. So we have found that gold overall, over longer periods of time, is not competitive with owning, again, even owning cash or short-term investments.

So there are moments when it makes a lot of sense to have gold in a portfolio, but that really requires capturing the timing of those moments exactly right. And as I was mentioning earlier, we believe and we see in the historical data that we're better off by not trying to time. And because gold doesn't convince us longer term, right?

We would rather have other assets in our portfolio that tend to be pretty safe, that don't tend to go up and down as much and pay us that interest rate. So that's mostly an analysis of what's happened in the past and knowing that gold doesn't pay an interest rate.

Crypto, on the other hand, obviously a huge emerging topic. It's something that we've explored a lot. We find it still to be so volatile. It just goes up and down so much on information that's hard for not just us individually, but for the whole world of analysts to understand that we find it difficult to place in regular portfolios. So it's not an argument against it. And there are plenty of people who have very strong and

very thoughtful observations around how it will take a bigger place, not just in portfolios, but in the world. But for us, when we're designing portfolios for regular people, we don't advise putting it as a standard allocation because it can just go up and down so much that it's challenging for us to really align it to the financial planning, to the goals that we're thinking about in individuals' lives.

Katie, as you are looking out toward the second half of the year and as we wrap this conversation, what else is on your mind? I think the second half of this year is going to be as busy as the first half of this year. I sure hope we don't get the same kinds of swings in financial markets and equities that we have. But I think there's a lot for us to really keep track of right now. Exactly the topics that you're asking, Jean, what's going to happen with economic growth? When are we going to feel that?

If we're just saying, oh, I mean, did you feel that the economy contracted the first quarter? Maybe if you had a bad January, February, March, but on average or in aggregate, it doesn't really seem like people felt it that much. So will we start to feel some of the worry that's present? Because if we're looking at lipstick or potatoes or whatever indicators, we're

including some very serious ones like consumers and businesses expectations or the savings rate, as you noted, Jean, I think there's a lot of anxiety.

And the anxiety is around not knowing what will happen soon. So many questions around tariffs, around regulation, around taxes, around budgets, around interest rates. And that makes it hard for us individually to make big choices and risks. And it makes it hard for companies to make big choices and risks, to build that new plant, to hire a bunch of people. So

So I think that the second half of this year is still going to involve processing a lot of information. And that could make for continued ups and downs in markets and potentially continued anxiety, even if things aren't that bad. I will say the U.S. economy is kind of amazing in that even when we get slammed by all sorts of bad news, we

we tend to be especially and unusually resilient, even relative to other economies. It's partly because we spend money very reliably, which I don't know if we should be proud of that or not, but it does help the economy. It's partly because we're a flexible, innovative place. So I don't think my message is all sour. It's just to say that geopolitically, politically, macroeconomically, we're working through a lot of changes right now. And that's going to take us

focusing on what we can control, focusing on our own planning and feeling like we're set up for different outcomes and recognizing that on the investment side, we could really get some ups and downs and we wanna make sure that we can continue to live our lives and meet our obligations and also sleep at night. So make sure that we're planning accordingly.

Sounds like the message is buckle up. Katie Klingensmith, Chief Investment Strategist from Edelman Financial Engines. Thanks so much for doing this today. Oh, thank you, Jean. It's been a pleasure. If you love this episode, please give us a five-star review on Apple Podcasts. We always value your feedback. And if you want to keep the financial conversations going, join me for a deeper dive.

Her Money has two incredible programs, Finance Fix, which is designed to give you the ultimate money makeover, and Investing Fix, which is our investing club for women that meets biweekly on Zoom. With both programs, we are leveling the playing fields for women's financial confidence and power. I would love to see you there.

Her Money is produced by Haley Pascalides. Our music is provided by Video Helper and our show comes to you through Megaphone. Thanks for joining us and we'll talk soon. There are some departments that if you go into them, you have to have really thick skin. And HR is one of them. Here we go again. I know. Here we go again. Right. But you're licking.

Everybody had to attend a mandatory Bible study because that supervisor was a minister and it was approved by HR. Her picture was also on there and her nickname was Do Me Decimal. Oh my God. I also had a college librarian. Her nickname was Big Tits McGee. Have you ever worked the full day with your kids hidden under your desk? No.

No. Allow yourself. Give yourself the privilege to be human. That's what it is. Just feel it so that you can go through it and come out the other side. Mic drop.