Easy guide to recessions—what they are, how to prepare for them, and what to learn from them
The word “recession” is an ominous one in economics and a phrase that often makes us cringe or hide under the table. Rightfully so!
Between inflation and murmurs of a pending recession, those fears have been heightened lately. There’s been no shortage of racy headlines and economic indicators flying at us these last few months. Heck, even recent Google Trends data shows that the search term “recession” hit its 18-year high in late July 2022.
Sounds a bit scary, yeah? Sure, but we know that education, planning, and empowerment is the best remedy for fear, misconceptions, and uncertainty about anything. So, let’s get started.
History of recessions
Dating back to the Articles of Confederation, the US has weathered about 48 recessions, give or take a few, depending on who you ask and how they define a recession.
Our recessions have consistently clocked shorter lifespans as time goes on. They averaged 22 months between 1854 and 1919, 18 months between 1919 and 1945, and 10 months between 1945 and 2001.
This means that over the long run, we’ve had a recession every 4.75 years, on average. Recently though, we’ve only experienced 3-4 recessions since 2001, meaning our economic blips are typically now less often and shorter.
We’ve gradually improved the severity and frequency of our recessions over time, mainly because we’re just getting better at handling them.
Defining a recession
The most broadly accepted definition of a recession is from the National Bureau of Economic Research (NBER), a private American research organization that operates as a nonprofit.
Their definition of a recession is experiencing a decline in economic output for more than two consecutive quarters—or, essentially, six months in a row. Two back-to-back quarters of negative GDP growth, which we’ve just experienced in 2022, constitutes a recession.
Quarterly GDP numbers take a long time to calculate and refine, and not to mention there’s a ton of data to review as part of that analysis. Because of this, recessions are something that, sure, we might have a hunch about them based on other indicators, but we’ll never really know if we were/are in one until much, much later.
Subjectivity of recessions
Many economists and laypeople don’t necessarily agree with the simple, GDP-based definition of a recession. Everyone uses their own criteria and has their own opinion on what counts as a recession.
Other things to consider when flagging a recession are things like: how high is the unemployment rate? are the public markets down? has real income been declining, and if so, by how much? how are retail and wholesale sales holding up? We also have to look at the reason behind each data point—a simple data point is meaningless in isolation.
For example, inflation is a decent predictor of recessions. Since the 1950s, each time inflation exceeds 4% while unemployment drops below 5%, we’ve experienced a recession within the next two years.
Ultimately, it’s hard to define a recession objectively and whether we are in one or not. Some might feel financial pressure in their particular position, whereas others never notice. That’s where we come in—we’ll help you prepare your finances for a recession, just in case.
Preparing for a recession
Preparing your finances for a recession doesn’t have to be brutal. We can help.
Save up: The biggest reason for being afraid of a Big, Bad Recession is just being afraid of the unknown. It’s the crazy amount of uncertainty that gets to us! While we can’t remedy this entirely, expecting the unexpected can help big time. How do we do this? By preparing for surprises by saving more than ever, and having a rainy day fund for if and when disaster strikes.
Budget better: If you’re already budgeting, congrats, you’re killing it! If you aren’t already budgeting, now is a great time to start. It’s never too late! Whether you’re a vet or a newbie, we can all use a potential recession as an opportunity to budget better. Recessions force many of us to work with less income and, if we're especially unlucky, endure the hell that is inflation. Whatever the details of the recession or sorta-maybe-recession, there’s no doubt that having an airtight plan for your money will go a long way in finding financial freedom.
Pay off debt: Although it might sound a little counterintuitive, paying off debt is a surefire return on your money. As opposed to losing a percentage of your interest payment, you’ll now recoup that amount to the extent that you paid the balance sooner than expected. Why is now a good time to get rid of your debt? In addition to everything else getting more expensive, the cost of debt (i.e., interest rates) is also rising. This means that debt, no matter the type, is more expensive than before—and weighs more on your expenses.
Simplifying it all
We can't always keep a recession from happening. But, when one does strike, we can help you fight your way through it and come out on top.
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