Photo of a suburban neighborhood at sunrise.

May economic outlook: The promise and the peril of predictions

Quick takeaways

  • Economic cycles are just that—cycles. Nothing goes up or down in value indefinitely. Diversifying your savings and investments may help protect against those peaks and valleys.
  • Does your spending line up with how you feel about the economy? If not, consider why, and what you can do to regain control of your budget.

Want to find an economic expert who will make all sorts of guarantees about the future of the housing market, jobs, or stocks? Just turn on the news or open a website.

But history is full of sure-fire economic predictions that never came to pass.

It’s natural to crave economic certainty, especially with all the upheaval of the last two years. But assurances of gloom may cause unnecessary worry, while guarantees of confidence can prop up unrealistic hopes.

Two things that are often the subject of incorrect predictions—the housing market and consumer expectations—are likely to make some moves this month. Here’s what that may mean for your wallet.

The housing crash that wasn’t

Two-plus years ago, pandemic lockdowns had plenty of people predicting dire straits for housing. Based on the 2008 recession, those pundits weren’t wrong to believe the future held plummeting home prices and a wave of evictions.

Only the reverse happened: Home prices have skyrocketed.1 More people got into the market than got out of it, causing a housing shortage.2 There were evictions, but nowhere near the tens of millions of families predicted to be without housing.3

Unlike 2008, our homes in 2020 became our offices, schools, and entertainment zones, meaning more of us wanted bigger spaces of our own. No one could have quite predicted the trickle-down economic impact that would have, but it’s proof that our values influence our financial choices. In other words: We’re human; we don’t always know what we want until we want it.

“The peril,” says Heather Winston, assistant director of financial advice and planning at Principal®, “comes in thinking past performance is future guarantee,” and that’s especially true in the housing market. Just because homes have generally gone up in value over the last few years doesn’t mean they always will—not even in the near future.

In the next few months, you can expect mortgage rates to rise in tandem with interest rates, exerting further push on the supply-demand tug-of-war. (It’s helpful to read up on what to do when interest rates move.) The housing demand crunch should ease in some areas, but more people may struggle with housing budgets. And if you wanted to do something like take out a home equity loan, the cost of borrowing that money may be more expensive. “It’s a moment for consumers to reset expectations, especially in relation to the recent past,” Winston says.

Your wallet: History showed experts what could, not what would, happen to housing markets. If you’ve enjoyed an increase in the value of your home, know that jump up isn’t a guarantee for a future sale price. If you’ve been saving to purchase a house but your budget doesn’t line up with what’s available, consider if you can delay buying until the market settles and your financial picture is less strained.

The clash of consumer sentiment and spending

Two monthly surveys measure the confidence households across America have for both their current and future financial security. Those numbers often offer a window into what will happen with consumer spending in the near term. The conundrum of late is that those two—sentiment and spending—have diverged in ways that quite a lot of people weren’t expecting.

Winston watches both numbers closely; they’re helpful to understand the financial realities and economic feelings of American households. “Are people spending in order to try to feel good, or spending like they feel good when they actually don’t?” Winston says. “The disconnect represents a need people are trying to fill. They can spend now on things they weren’t able to during COVID—going to dinner, seeing a concert with friends, for example.”

The catch, of course, is when budgets and spending are in a mismatch. If that happens, there may be economic implications that aren’t turning up in a survey or spending data. “We’ve all made a lot of behavioral shifts over the last few years,” Winston says. “Sometimes our behavior gets out of step with the things we feel like we can control, especially when it comes to spending.”

Nothing—not a survey, a housing market, or an economic prediction—is completely certain, which is why Winston advocates distancing yourself from overwhelming news and data. “Back when shutdowns started, the only thing that was certain was that there would be an impact. What people chose to do with that impact was, in some respects, up to them,” she says.

“Then and now, you can listen to the experts and even their predictions but recognize when you need to refocus on what you can truly control. Living your life shouldn’t be dictated by the daily news cycle.”

Your wallet: Most experts didn’t expect inflation to be as sticky as it’s been—another way that reality has diverged from predictions. Budgeting for inflationary pressures isn’t just about today’s spending, but about tomorrow’s prices, even decades from now. Consider that when reviewing your long-term goals such as retirement savings. Although some spending categories (those related to a daily work schedule for example) may decrease, others may not, and inflation will affect your planned post-work budget.

What's next?

1 Redfin, WSJ
2 Time
3 Eviction Lab

The views and opinions expressed are for informational and educational purposes only as of the date noted and should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.

Investment advisory products offered through Principal Advised Services, LLC. Principal Advised Services is a member of the Principal Financial Group®, Des Moines, IA 50392.

Insurance products and plan administrative services provided through Principal Life Insurance Company®, Securities offered through Principal Securities, Inc., member SIPC and/or independent broker-dealers. Investment advisory products offered through Principal Advised Services, LLC.