What is a Recession?

Aug 22, 2022 2:33:10 PM

While the US job market continues to be strong, adding over 2 million payroll positions in 2022, there’s also growing talk of a recession. What is a recession? How will we know when it arrives? And—perhaps most importantly—what should we do to protect our finances?

A Downturn in Economic Activity

There’s no single agreed-upon definition for what counts as a recession. Some say a recession means any notable decline in economic activity. Others take a more strict view, saying it’s not a recession until falling GDP is recorded for at least two consecutive quarters. Still others say a recession must be viewed holistically: hence the reluctance of some economists to cite a recession in 2022, when declining GDP is still accompanied by robust employment growth.

The Impact on People and Businesses

Recessions are considered a normal part of the economic cycle—but that doesn’t mean they’re easy. A recession often indicates higher levels of unemployment, which can make it tough to find a new job or hang onto the one you have. Consumer demand tends to fall during a recession, leading to a parallel downturn in retail sales and overall economic activity, which puts a strain on businesses and the job market. During a recession, the stock market declines as well.

How to Stop a Recession

When trying to tackle a recession, a government’s main aim will be to push the economy into the next stage of the financial cycle. This may involve incentivizing consumer spending via tax cuts or smaller interest rates, upping government spending to create new projects that bring new jobs, or quantitative easing to encourage lending and get new money into the market. Of course, any approach will be impacted by other economic circumstances. In 2022, for example, the ongoing issue of inflation means the government is unlikely to lower interest rates.

Protecting Your Finances During a Recession

The effects of a recession can last for just a few months, or many years. During a time of economic downturn, there are a few key considerations to keep in mind:

  • InvestingA recession can feel especially nerve-wracking if you’ve got money in the stock market, whether it’s personal investments, a company retirement plan, or an Individual Retirement Account (IRA). While it’s impossible to issue one-size-fits-all advice, experts often say that it’s a good idea to avoid investing in high-risk companies during a recession and instead look at consumer staples or utilities. In general, it’s a good idea to ride out a low market rather than pulling investments, but your individual investing strategy is highly dependent on age, retirement plans, other assets, and so on. Always consult a professional before making any permanent decisions. Many retirement plans provide access to one-on-one counseling to review your retirement portfolio. If you have questions about your investments; make an appointment to speak with an account representative that is able to provide retirement advice.
  • Employment – It’s often more difficult to find well-paid work during a recession. Still, many jobs are considered ‘recession-proof’, including healthcare workers, teachers, care-givers for the elderly or children, and utility workers. At the moment, the US job market continues to be very strong—but if you are looking for work or considering a job change, the threat of recession may be something to keep in mind.
  • Housing – If you’re looking to buy a home, there are advantages and disadvantages of doing so during a recession. While home prices have been steadily increasing over the past few years, experts are predicting that home prices will now start to fall, particularly in overvalued markets, with housing supply increasing. This is good news for homebuyers, but on the other hand, interest rates may continue to rise—making it more extensive to take out and pay off a loan.
  • Budgeting – There’s no time like the present to get on top of budgeting, and this maxim is particularly true when economic downturn is on the horizon. Experts recommend having three to six months of living expenses saved, so if your account is running dry, look at ways you can take action in order to save more. A budgeting app can help you track spending and stick to your savings goals so that if you’re caught in a recession, you have something to fall back on. You can also contact GreenPath Financial Wellness for free budget counseling.
  • Debt – Whenever possible, you should continue to pay off debt during a recession. Even better, aim to pay off more debt before a recession, so that if unexpected financial hardships do arise, you’ll be better able to tackle them. However, before accelerating debt repayment, make sure your emergency savings is well funded; having an emergency fund will minimize the possibility of you having to go into debt when financial emergency rises in the future. Working with a financial counselor may be helpful in determining your debt repayment strategy. In addition, be careful about relying too heavily on credit cards or loans during a recession, which could further complicate your financial situation if you’re already struggling with debt. Additionally, credit card and loan rates tend to increase during a recession, making the cost of the debt even more expensive.

Tags: Money Tips