How Do We Know If We’re in a Recession?

Whenever we turn on the news, we see the same word plastered over and over again on each channel: recession. Money managers, pundits, bankers, politicians, you name it, the word on everyone’s mind is recession.

So, what exactly is it?

Economies are doing best when they’re growing. For any country, a strong indicator of their future success is to see steady growth over a set time period, usually on the order of months or years. A nation’s Gross Domestic Product (GDP)—the value of the goods and services it produces—can increase the value and wealth for the state as well as its citizens. When GDP is growing, market prognosticators are more bullish on the economic future of the country.

But when a country’s GDP doesn’t grow, but in fact shrinks or contracts over a set time—say, a few months to a year—the economy enters what’s called a recession. A recession over a few quarters is a sign of ill health for any economy and can be a distinct source of worry, frustration, and anger for the people affected by it.

A recession, which is less serious than a depression—a sustained period of economic shrinking, i.e., the Great Depression—but still a trend in the wrong direction, can directly impact the quality of life for many people. A growing economy produces more goods, more jobs, more services, can lower costs and even raise wages. A growing economy can also afford to cut taxes or add more value to the lives of citizens. A recession can dampen or even remove many of these gains and make it hard to grow in the future at a comparable rate. It can also make it hard for financially minded people to see gains from their efforts.

Over summer 2022, the word recession was thrown around a lot, with many forecasters and economists arguing both for and against the likelihood of an impending economic downturn. We all watched inflation run amuck as our gas prices skyrocketed before gradually lowering again. While a true recession has yet to emerge in the United States, other nations—such as the UK—are already preparing for a potential recession by the end of the year. National policies are being readied around the world to try and combat the lack of growth and potential setbacks that are likely to occur.

With all this talk of an imminent recession, the average person might wonder what they need to do to prepare, and if they should be worried about the effects.

Preparing for a Downturn

The first thing to note is that it’s important to not panic. The United States, and most countries of the world, have gone through numerous recessions and come out of them successfully. Recessions in the past United States have been caused by numerous factors and have many different economic effects that impacted people in disproportionate ways. While government policy can both prolong and lessen a recession, there is considerable debate as to the exact causes of a recession and its remediation, and the powers of government in handling them.

There are a few areas the average person tends to feel a recession:

  • Jobs (including hiring and wages, promotions, etc.)
  • Prices (subject to possibly wide fluctuation in price and value)
  • Loss of value for stocks and investments
  • General financial uncertainty

For most people, the biggest of these areas is employment. A shrinking economy can mean a slowdown or even a halt in company growth and profits. It can also mean a company loses money, which might prompt layoffs. Layoffs mean more people looking for work, and with hiring freezes more common, it can be difficult to find a replacement job in an unstable economic environment. Worse yet, your mental health can take a hit if you’re concerned about your job or the future and what you need to do to survive.

Whether you’re employed or not, there are some important financial moves you can make to help strengthen your position and your financial footing:

  • Budget for your cash on hand as well as your total assets
  • Make a weekly or monthly budget for household items, and keep careful track of all money going in and out
  • Reduce or eliminate any unnecessary purchases
  • Increase your savings as much as possible
  • Analyze your level of debt and prioritize payment schedules accordingly (usually by the loan or debt obligation with the highest APR paid off first to reduce interest payments)
  • Carefully prepare your emergency funds

With a firm budget and a realistic appraisal of expenditures in hand, you can start making cuts or trimming unneeded items. You can shore up your savings and allocate more money to accounts with higher interest rates, which are felt more during a recession. If you are to lose your job during a recession or have a prolonged period of seeking a new job, having a budget and a good savings can really help brace you for the ups and downs and tide you over until the next paycheck.

Budgeting based on needs and priority can help you sort out the immediates from the intermediaries. For example, car payments, food, electricity, and the like are all on the first rung of the payment ladder. You’ll need all of them; you’ll also need internet to help you look for jobs or to keep your current one. Keep on top of your bills and don’t let any additional debt begin to pool. Be very careful of interest rates, and budget your grocery trips with smart savings and coupons.

Strengthening your network connections is also a good idea. So often a new job comes through based on a recommendation or a referral from a friend or former coworker. Keep in touch with your network so you don’t lose out on potential jobs. In turn, make sure and keep an open dialogue with friends, relatives, and coworkers who might also want a job, if you’re on a sound employment footing and able to help. In a recession, it’s vital to help each other out.

Make sure and carefully check your investments and keep a track on your stocks. While a hit to their value is often expected during a recession, knowing when to hold and when to get out comes down to experience and advice from professionals, or your own level of risk tolerance. Remember that while recessions don’t last forever, they can be felt much stronger for a long time for the average person.

These solutions work equally well in lean times as robust ones. There is never any downside to having an accurate budget with a clear stock of financial assets and obligations. A recession can last for months. In worst cases, in can last for years and possibly turn into a depression. Savings and preparation that accounts for a potential long haul is the best target to aim for.

Alert, Prepared, and Financially Well

All this being said, it’s important to note that financial budgeting can serve you in good times and in bad. There are many options available if you’re struggling, and it’s never a bad idea to ask for help, especially for something as important as your wealth. Don’t take chances, pay attention to news and economic indicators, and keep up to date with friends, relatives, colleagues, and a network of assistance and information. Get ahead of problems before they emerge.

There are no guarantees we’ll enter a recession, but it is guaranteed that sound financial preparation and budgeting will help you alleviate many problems before they arise.