At this point, pretty much everyone knows the word “recession” is bad news for the everyday worker in the United States, but what actually happens during one? And, uh, do Americans need to expect one in the near future? Let’s just say it’s good to be prepared. Here’s everything you need to know about what happens during a recession, from how it affects the average person to what causes one, and everything in between.
While people all over the nation are already experiencing the strain of economic hardship, economists say the United States may be on track for one “whopper” of a recession in 2023, per CNBC. “Super simply, a recession is a period of economic downturn,” Vivan Tu, former Wall Street trader and current personal finance guru as Your Rich BFF, tells Elite Daily. Tu notes how recessions can be can be caused by a number of factors, like world events, increased interest rates, falling housing prices, a stock market crash, and more. “Think of it like a series of dominoes, one event, impacts another, and another, and another until the economy sees a downturn.”
OK, but what is a recession, really?
According to the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER), the organization which declares recessions, the conventional definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Now that sounds pretty vague in theory, but in practice, there are a few specific qualifiers the organization uses to measure them. These are often called “The Three D’s” – depth, diffusion, and duration, per Investopedia. “Depth” refers to the severity of the decline in economic activity, “diffusion” refers to how that decline is spread across different aspects of the economy (like industries and geographical regions), and “duration” refers to how long the decline lasts, from the beginning of the recession to recovery.
As you can imagine, it gets extremely mathematical and formulaic, which is usually only helpful for economists holed up in their offices. But for the everyday worker in America, recessions mean furloughs, layoffs, reduced hours, closed businesses, late rent, unpaid bills, and more. They’re also generally marked by a widespread decline in consumer spending.
“Typically, we’ll see businesses sell less [products or] services, people make less money, and less industrial production,” says Tu. Sound painfully familiar? According to an April 2021 study from Pew Research, when coronavirus hit in early 2020, roughly 9.6 million workers lost their jobs because their employers either closed or lost business amid the pandemic.
How long do recessions last?
While recessions often last several months, or even years, NBER’s Business Cycle Dating Committee states the economic downturn amid the COVID-19 pandemic was so severe, it didn’t need to last too long to qualify as a recession. “In the case of the February 2020 peak in economic activity,” the committee states on their site, “we concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief.” A recession is technically over when the economy begins to grow again, no matter how slow that growth is. However, if the economy doesn’t recover within three years, or a recession results in a 10% drop in annual Gross Domestic Product (GDP), then the country has fallen into a depression, per Investopedia.
Although “recovery” from recessions technically happens when the economy is no longer actively declining, it can take years for things to return to the way they used to be. “Recessions can last anywhere from a few months to a few years,” Tu says. “It really depends on what caused it in the first place. Oftentimes, even if one aspect bounces back, like the stock market recovers, things like unemployment may linger for longer periods of time.” To point, approximately 9 million Americans lost their jobs due to the recession, and over 6 million lost their homes due to foreclosure. The economic downturn during the Great Recession didn’t bottom out until late 2009, per Investopedia, and employment rates didn’t recover until 2014. Overall, recovery after a recession occurs when “the economy adjusts and recovers some of the gains lost during the recession.”
What causes recessions?
Aside from large-scale natural disasters and raging pandemics, recessions can be caused by several other events, like a financial crisis, demand or trade shocks, or the bursting of an economic bubble. For example: The 2008 housing market crash, one of the economic factors behind “the Great Recession,” is perhaps the most recent example of a financially-driven recession in America. That crash was largely caused by insufficient regulation on predatory mortgage loans, and questionable corporate ethics on the part of mortgage lenders, investors, and investment banks. When those predatory mortgage loans backfired, millions of borrowers defaulted on their loans, and the real estate market crashed in 2008. The big point, though, is whether they’re caused by natural disasters or man-made financial disasters, recessions are often completely out of the control of the average worker in America.
How to prepare for a recession
Even though economic growth is the general long-term trend in the United States, it’s important to stay prepared for a recession in a few ways. “Setting aside additional dollars as part of an emergency fund could be very helpful,” Tu says. “Typically, I recommend three to six months of living expenses saved, if possible, but to prepare for an oncoming recession, six to nine months may be more prudent,” she adds, noting how it’s also important to keep your resume up to date. “Recessions are often times of uncertainty, and smart, talented people may lose their jobs for reasons beyond their control — so make sure even if you’re happy in your current seat, always keep an eye out for other opportunities!”
Tu also recommends staying away from gathering risky debts. “Avoid high interest rate debt even more than usual. Typically, rates will rise in recession-like environments, meaning borrowing money, especially on a credit card is more expensive than usual,” she says. Instead, she explains you can get the most bang for your buck with a special type of savings account. “Make sure to open a high yield savings account because as rates rise, so will the interest you get on that account. It’s an easy way to make your savings work harder for you.”
If you’re gainfully employed but you’re worried about seeing your 401(k) tank in value during a recession, it may be tempting to reduce your investments. However, financial advisors have continually discouraged making any huge financial decisions based off panic, and encourage investors to remember that in the United States, the long-term trend has always been economic growth. So no matter what circumstance you see yourself in, it’s always helpful to stay ready.
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