This phenomenon lasts for months, marking a significant decline in economic activities. It cannot be avoided in a business cycle or the typical rhythm of expansion and contraction in a country’s economy.
What is a recession?
It is a crucial, widespread, and extended headwind in economic activity. A standard method is that successive quarters of downward gross domestic product (GDP) growth would equate to a recession. This would also include a higher level of unemployment, dropping retail sales, and a slowdown in measures of income and manufacturing for an extended period.
In technical terms, a recession is when the National Bureau of Economic Research’s Business Cycle Dating Committee declares it to be one. They define it as a noticeable plunge in the economy across the financial system that lasts more than a few months of a downturn.
Causes of a recession
Many theories try to explain why and how an economy enters a recession. However, these speculations can be broadly classified as economic, financial, psychological, or a mix of these factors.
Some focus on changes in the economy, such as structural shifts in industries. For instance, aggressive rallying oil prices across the economy can lead to this prolonged dilemma.
Other economists claim that financial factors are the reason for recessions. These have their eyes on credit growth and the build-up of financial risks in buoyant economic times, the shrinking of supplies in money and credit when it begins, or both. A good model of this theory is monetarism which notes that a lack of growth in the money supply brings recessions.
Another theory for this focuses on psychological factors like rowdiness in economic booms and significant pessimism during problems to explain the occurrence of recessions.
Warnings that may hint at an upcoming recession
Consumer confidence plunge– This factor is the primary driver of the US economy. If there is data that reports a sustained fall in consumer confidence, it could be a sign of a possible problem for the economy. If this declines, people do not feel good about spending money. This could slow down the economy if it follows through.
Higher unemployment rate- People losing their jobs would negatively impact the economy. A few months of severe job losses is a massive threat of a close recession despite the NBER not officially declaring one yet.
An unexpected drop in the stock market– a severe and sudden decline in stock markets could show hints of an upcoming recession. Investors would likely sell off parts and sometimes their entire holdings as they anticipate an economic downturn.
During a recession, there are a lot of risks going around. Here are some things to avoid during this negative situation:
Debts- It would be acceptable to take on new debt, such as a car loan or student loan, when you earn sufficient money to cover payments and have some spare to save. However, when there is an economic downturn, risks increase, possibly including getting fired or losing income from your business. Once your money declines, it could complicate your financial life.
Taking your employed life for granted– Large companies are still not safe from being under financial pressure in a recession. This can lead to cost cuts, which could cause job layoffs. Since work is vulnerable during this downturn, employees cannot take employment for granted. If an economy is declining, it is essential to consider your options wisely.
Risky investments- This is applicable to business owners. As you think about ways to expand or develop your business, a recession may not be the right time to risk bets. It is important to remember that you should prevent going headfirst into investment projects that need your to have a new debt to support it. A slowing business as a recession is occurring may lead you to delay interest payments on time.
Co-signing loans- This move is quite risky and is dropping economic situations. If a borrower cannot meet the required payments, the co-signer might make them. Since borrowers and co-signers may lose their jobs, the risk of being associated with this debt would increase.
How can a recession affect your money?
You may lose your job because of the rise in unemployment rates. Also, finding another one would be difficult since more people are out of work. If people manage to keep their jobs, they might see a cut in their pay and benefits.
Assets such as investments in stocks, bonds, and real estate could lose money during a recession. There may also be a reduction in your savings that can affect your retirement plans. Furthermore, you could lose your home and other properties if you cannot pay your bills cause of unemployment.
Business owners could have weaker sales during a recession. Some may even be forced to go bankrupt. Even if the government attempts to support businesses during this economic downturn, keeping everyone financially safe in a recession would be difficult.
As the number of people unable to pay their bills increases, lenders would have more uptight standards for mortgages, car loans, and other financing sectors. As a result, you should have a more robust credit score or a higher down payment to take on a loan.
A recession is a challenging problem to face that is hard to survive in. These are a few ways how to prepare for it:
Know where you stand financially– Assessing yourself financially during this brutal downturn is essential. Ask yourself how much cash you have currently, how deep you are in debt, your basic monthly expenses, etc. You should learn the amount you spend and anticipate your needs for the coming months. The next step would be to build an achievable budget plan to stick to as you prioritize more necessary expenses.
Focus on repaying your debt- Put your bills first so your cash can cover as many debts as possible. You can also get help from your creditors if you need to catch up.
Consider your opportunities- It is essential to have backup plans when you face a layoff. You can pick up side gigs such as freelancing. Taking the opportunity to have an extra source of income can help you during times of crisis.