Key points to remember
- During a recession, the whole economy is down and everyone feels the impact in one way or another.
- With less money in circulation, the number of unemployed increases, leaving many people out of work and reducing their spending.
- The NBER has yet to officially declare a recession, and many experts cannot agree on when one will be announced.
We keep hearing that a recession is looming, but there has still been no official announcement, even though at the start of the summer the United States had two consecutive quarters of negative GDP growth. This information alone would normally dictate that the economy is in a recession, but much more goes into the decision.
The official markers of the recession are economists from the National Bureau of Economic Research (NBER). There is no official threshold for a recession, but the NBER will look at GDP growth, real personal income (RPI), labor statistics and consumption to track the overall performance of the economy.
However, worries of an impending global recession are enough to make most people nervous about their finances. We’ll look at what a recession means for most of us and what you can do to prepare for what’s to come.
When will we announce a recession?
When an official recession is announced, the overall economy contracts and there is a period of significant economic decline. Economists look at various factors before declaring a recession and do not take bad times as a benchmark.
However, we cannot deny that negative GDP growth coupled with runaway inflation leaves most of us losing faith in the economy. The resilient labor market has supported the economy for some time, with an unemployment rate of 3.5% in September 2022. This, combined with strong household savings, has sustained the economy as people continue to spend money.
Although we are not yet officially in a recession, many experts believe that a recession will happen, but they simply cannot agree on when it will be officially announced. All of this uncertainty has sparked fears about what to expect in the coming months as households continue to grapple with the rising cost of everyday items.
What does a recession mean for the average person?
We’ll break down the impact of a recession on the average person so you know what to expect.
A recession hurts the labor market
The worst case scenario of a recession is that you could lose your job, as high unemployment means and correlates with a declining economy. When consumer spending declines, it forces companies to adjust their operations, so they may have to lay off staff to compensate for lower consumer spending.
During the Great Recession, unemployment more than doubled, forcing millions of Americans out of work. Those who don’t lose their jobs worry about pay cuts, reduced hours, and the possibility that companies aren’t as willing to offer bonuses and other financial incentives. Companies are also reluctant to hire new recruits during a recession, so finding a new job would be difficult if you’re fresh out of college or looking to transition into a new field.
If you lose your job, you would also lose your health insurance with your employer, which would put your family in a difficult position as you would have to shop around for new coverage. The loss of health insurance could also lead to increased expenses since you would have to spend more money out of your own pocket for medical emergencies and medications.
A recession drives the stock market down
Consumers will cut spending, pumping less money into the economy, which means businesses will report lower profits. To make matters worse, some investors will sell off their stocks in response to fears of recession, rising inflation and rising interest rates. If you’re planning to retire soon or take money out of the stock market to pay for a major expense (like a wedding or buying a new home), you could be waiting a lot longer than expected.
A recession means everything is more expensive
A recession is often caused when interest rate increases are used to slow the economy due to rising inflation. As we have seen in 2022, the prices of everything around us have risen and people are spending more than ever on basic necessities (rent, electricity, food). With prices rising due to inflation, your money does not go as far, so you are unable to maintain the same quality of life.
During a recession, you will find it difficult to save money due to your reduced purchasing power. When you can’t save that much money, you can’t spend on travel and other luxuries, which hurts anyone working in those industries. You may also have to make some sacrifices, as fuel prices and food costs will make you think twice about spending money.
A recession means higher interest rates
The Fed raises interest rates to calm the economy, making the cost of borrowing more expensive. Higher interest rates mean you have to spend more money on your current debt, and you’ll think twice about taking on new debt.
Your credit card balance will now result in higher payments, but your mortgage payments will remain the same if you have a fixed rate mortgage. Many households are already depleted by living expenses, so spending more on credit card debt would take other areas out of Americans’ budgets. Higher interest rates could also put home improvement and memorable vacation plans on hold.
A recession affects your ability to get a loan
Even if you still want to borrow money despite higher interest rates, lenders will think twice about lending money during a recession because they will consider your job security during the loan process. ‘approval. Difficulty getting loan approval could force you to put off a big purchase, like getting into the real estate market or buying a new vehicle. It could also set you back in life because you have to wait to make a major purchase that would help you move into the next stage of adulthood.
How to prepare for a possible recession?
Although there is no advantage to being in a recession, it does not mean that we should panic, because it is a normal part of the economic cycle. We need to do everything we can to prepare for a possible recession, because we don’t know how it will affect us until it happens. Here’s what you can do now to prepare for a possible recession:
- Start paying off your debt. That credit card balance will cost you more when interest rates rise, so you need to be aggressive about paying it off.
- Save an emergency fund. You want to save at least three months of living expenses in the event of job loss so that your bills are still covered and you have enough money to get by.
- Diversify your sources of income. During a recession, relying on just one source of income is risky, so you may want to turn to a side hustle or find an extra part-time job to protect yourself.
- Look for a recession-proof career. If your industry depends on a strong economy, now would be a great time to consider changing careers. You may also want to refresh your CV and contact your network so that you are ready to take such a step.
How to invest?
During volatile times, the market reacts to any kind of news, so you can expect big swings that are hard to ride out as you watch your portfolio slide. During a recession, there is less money circulating in the economy and the stock market is down.
Inexperienced investors will sell stocks due to the uncertainty caused by rising inflation. People want more cash and security, so they start pulling out of the stock market, causing stock prices to fall further. It is a vicious circle that is very difficult to follow in real time.
You can make your portfolio more defensive to manage uncertain times to be prepared for increasing volatility. Take a look at Q.ai’s Inflation Kit and consider activating Portfolio Protection to protect your gains and reduce your losses no matter what sectors you invest in.
At the end of the line
A recession will impact all of us in one way or another, but that doesn’t mean we should stress about it more than necessary or overreact to the market drop. A little preparation ahead of time can go a long way to getting you through the worst-case scenario should this happen. We still don’t know if a recession will be heralded as the Fed has two more meetings to hold in 2022, where it will pay close attention to the economy to see if rate hikes should continue.
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