Your Free Guide to Going Through a Recession
Introduction to Recessions
In the wake of the COVID-19 pandemic and rising inflation costs, many Americans worry about a potential recession or wonder if we are currently experiencing one. Such severe economic downturns like these can have lasting impacts on the economy, businesses, and everyday life.
For many, waiting for a recession can feel like waiting for something terrible to happen, leading to undue stress or even widespread panic. However, understanding what a recession is and how to prepare for it can help reduce feelings of anxiety and dread and may help you prepare your finances for worst-case scenarios.
In this guide, you can find information about what a recession is, how it could impact you, how it differs from a depression, and how you can prepare for it.
What is a Recession?
By definition, a recession is a severe, widespread, and prolonged economic downtown. During a recession, businesses typically experience sharp declines in sales and profits, consumer spending decreases, unemployment rates sharply increase, and the economy stops growing.
In the United States, the National Bureau of Economic Research (NBER), a non-profit organization, tracks business cycles to determine when a recession begins and ends.
The terms “depression” and “recession” are commonly used interchangeably. However, while a recession can become a depression, these terms do not describe the same event. A depression is a far more severe time of economic weakness.
For example, the most recent depression in American history was the Great Depression of the 1930s, when unemployment rates rose to nearly 25%, the economy was crippled, and almost half of all the banks within the country failed. For comparison, during the 2007-2009 recession, when the housing market crashed, unemployment rates rose to just 10%, according to the U.S. Bureau of Labor Statistics.
Another term that gets mentioned in the same breath as recessions and depressions is “inflation.” Periods of inflation do not necessarily indicate a recession. However, inflation is often present in times of recession. Inflation is a sharp rise in prices, which can lead to a decline in non-essential purchases and further the economic downturn of a recession.
While the U.S. is presently impacted by inflation, the country is not in a recession. During the COVID-19 pandemic, the United States briefly went into recession in early 2020. However, the recession ended in April 2020, making it the shortest economic downturn in U.S. history. The reason the recession was so brief was, in part, because of measures enacted by congress, including the CARES Act and stimulus payments.
Common Causes of a Recession
Recessions are caused by chains of events that severely impact the economy, including the following:
- Supply chain disruptions
- Financial crises
- World events
- Severe inflation
- Trade conflicts
- Political instability
- Natural disasters
- Failing consumer confidence
- Overproduction and oversupply of goods and services
Every recession in U.S. history has been different, so there is no single cause for recessions. However, to better understand the common causes of a recession, it’s essential to look back on some of the most notable recessions in the last few decades.
- The COVID-19 Pandemic Recession – February 2020-April 2020: Work and travel restrictions early on in the pandemic caused a brief but sharp recession where unemployment rates rose from 3.5% to 14.7%.
- The Great Recession – December 2007-June 2009: Falling home prices, poor housing regulations, and the failure of home loan investors and lenders caused the housing market to collapse, leading to the financial crisis of The Great Recession. In addition to high unemployment rates, many homeowners lost their homes.
- The Dot-Bomb Recession – March 2001-November 2001: The Dot-Bomb Recession was one of the mildest recessions in U.S. history. Massive growth in internet use and rapid online vendor growth took a sudden downturn when many online shopping businesses failed, causing stocks to plummet.
- The Gulf War Recession – July 1990-March 1991: The Gulf War Recession was caused by a combination of the war’s impact on oil shortages and prices and an unstable residential mortgage market where many small local banks failed.
Signs and Predictors of a Looming Recession
High inflation rates and a post-pandemic world have led many consumers to worry about a potential looming recession, but how likely is it that a recession will happen? While many factors and events can cause a recession, here are some signs that may indicate a looming recession:
- U.S. Treasury bonds, an all-around low-risk investment, grow sharply in demand, and interest rates and yields are reduced
- Sudden wage inflations to make up for hiring shortages that become counterintuitive and result in slower business growth and later layoffs
- Rising inflation
- Sharp increases in unemployment rates
- Decrease in housing sales or property values
How Long Recessions Can Last
Historically, a recession can last anywhere between several months and several years. In recent decades, the shortest recession was during the COVID-19 pandemic, which only lasted about two months. However, the Great Recession of 2007-2008 lasted a year and a half.
Stages of a Recession
Many experts agree that there are five stages of a recession. If a recession were to happen in the near future, here’s how it would most likely play out:
- Recession: The first stage of a recession is characterized by an overall economic downturn, which can be manifested as fewer employment opportunities, less consumer spending, lower production levels, etc.
- Trough: The trough is when the economy reaches its lowest point during the recession before things begin to turn around. At this stage, unemployment is generally at its highest rate.
- Recovery: When the economy grows again, the recession enters its recovery phase. This process generally starts off slow, with consumers and businesses gradually increasing spending.
- Expansion: During the expansion phase, the economy is finally growing again at a healthy rate. New jobs may be created, consumers begin to feel more confident about the future, and companies are thriving.
- Peak: The final stage of a recession is the peak, when the economy is at its highest point. This phase continues until the economy begins to slow down again or falls into another recession, repeating the economic cycle of recessions.
Economic Impacts of a Recession
Recessions have a widespread economic impact that affects businesses and consumers alike. Here’s a closer look at how a recession impacts the economy.
Impact on Employment
Unemployment rates typically increase, and average wages can decrease during a recession. Additionally, businesses may choose to keep employers on the payroll but cut employee hours to reduce the company’s financial hardships.
Impact on Housing
During a recession, it’s common for home value and purchases to decrease. Home loans commonly have higher interest rates, so there are fewer buyers. Because so many people can be pushed into renting during recessions, rental costs can also rise.
Impact on Prices
During a recession, prices for goods, gas and services can behave unpredictably. Inflation for essential items can often rise, further straining consumers’ finances. However, because recessions cause consumers to have less disposable income, many non-essential items have less demand and thus may become cheaper.
Impact on Businesses
Consumers aren’t the only ones that can suffer during a recession. Less consumer spending, less demand, and more layoffs can lead to significant profit loss and decreased stock value. Businesses are also more susceptible to closure and bankruptcy, especially smaller businesses.
Impact on Credit
A recession can cause lenders to become more stringent about their lending standards, making it more challenging for consumers to get new lines of credit or a new loan. Additionally, interest rates often become higher.
Personal Impacts of a Recession
Anyone can be impacted by an economic recession, regardless of household size and income. Here are some ways you may be affected in a recession.
Impact on Your Job
As businesses struggle to handle the challenges of decreased consumer spending, unemployment rates can increase as companies begin cutting their workforce. Depending on your field and business, you could face a layoff or a reduction in your working hours. Additionally, companies are less likely to provide financial incentives to employees, such as bonuses or raises.
Impact on Your Savings and Spending
Because of inflation, decreased wages, and a potential increase in housing costs, you’ll likely need to tighten up your budget and reduce spending on non-essential goods and services. Additionally, you may not be able to put as much towards savings, or in a worst-case scenario, you may need to dip into your savings to get by.
If you are an investor, your investment portfolio may take a hit during a recession. One silver lining is that some savings accounts see increased interest rates to combat inflation.
Impact on Living Expenses
Living expenses commonly increase during a recession, including household expenses like:
- Rent and mortgages
- Basic household goods
Impact on Entertainment and Travel
Prices for entertainment, travel, and other non-essentials, including air travel, vacation hot-spots, and gas prices, may decrease. If your finances haven’t been impacted as much as others, you may be able to take advantage of these reduced prices and afford luxury items or trips you weren’t able to previously.
Tips for Preparing for a Recession
Most Americans will experience at least one recession in their lifetime, so it helps to be prepared for the inevitable. Here are some ways to prepare and mitigate a recession’s financial challenges.
Create an Emergency Fund
An emergency fund can help you get through increased costs or a potential job loss during a recession. It is often recommended to save between three and six months’ worth of your living expenses. Managing your budget, cutting back on spending, reevaluating your budget, and setting up automatic savings transfers can help you start to save more each month.
Double-Check Your Budget
Knowing how much you’re spending and what you’re spending money on is important. Rather than make estimates, take the time to write out each of your monthly expenses, how much you pay towards each expense, and your monthly net income.
Then, determine if there are any services, goods, or other costs you can cut to put more toward savings or current debts. It may be a good idea to double-check your budget several times a year, especially if you experience a significant financial change, such as a change in career, a raise, or after you’ve paid off a debt.
Reduce Your Spending
Are there any expenses you can reduce? For example, do you buy goods you don’t really need or luxury items? Do you use all of your subscription services, such as cable, internet, streaming services, or gym memberships? Downsizing subscriptions, cutting back on shopping habits, and eating out less can all be great ways to save more money.
Pay Down Existing Debt
Your debts won’t go away when a recession hits. You’ll still be expected to pay those monthly expenses, and the more debt you have, the more challenging it may be to keep up with your bills. If you have multiple debts, go after the higher-interest debts first, such as credit cards. Alternatively, debt consolidation may be an option to reduce the number of bills you have each month.
Update Your Resume
Because a recession can cause a large amount of layoffs and unemployment, you can save time by updating your resume now. That way, you’ll be ready to apply for a new job if you lose your current one.
Consider a Career Change
Consider a career change if you work in an industry that is prone to layoffs during a profession. Some recession-proof careers to consider include the following:
- Medical professionals, including pharmacists, Registered Nurses (RNs), physicians, paramedics, dentists, and veterinarians
- Specialized medical care fields, including physical therapists, substance abuse counselors, chiropractors, mental health professionals, and social workers
- Law enforcement officials and the professionals who support them
- Public utility workers, including employees in recycling, trash, waste, sewage, electric, and water services
- Financial professionals, including accountants, tax preparers, claims adjusters, and auditors
- Education professionals, including teachers and special education professionals
Are you in an industry that is heavily impacted by recessions? Some of the jobs that experience the most significant amount of layoffs in a recession include:
- Home furnishing retail
- Auto dealerships
- Travel agencies
- Printing services