Recessions Explained: Definition, Warning Signs and What Happens During One
Unfortunately, it’s hard to determine that the economy is in a recession until it has already actually set in. With the economy now dangerously close to a state of recession, or perhaps even already there, it has never been more important than now to understand what happens in a recession.
Read: With a Recession Looming, Make These 3 Retirement Moves To Stay on Track
What Is a Recession?
Simply put, a recession is a period of decline in a country’s economic activity.
The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity spread across the economy, normally visible in production, employment and other indicators. A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough.
Economic Recessions in the U.S.
Recessions are a normal part of the business cycle. There are periods of economic growth and periods of economic slowdown and it’s all part of the same cycle. The recession in 2020 was unprecedented because it occurred when COVID-19 upended the economy by forcing businesses to shutter and encouraging people to stay home. By definition, a recession has to last at least two quarters, so you can’t tell you’re in a recession until after the fact.
How Long Do Recessions Last?
Historically, there have been a total of 34 recession cycles since 1854, lasting an average of 17.5 months. If you consider the period from 1945 to the present, the average length of a recession has been 11 months.
Longest American Recessions: The Great Depression Onward
Recession Period | Start | End | Total Time Elapsed |
|---|---|---|---|
The Great Depression–Late ’20s and Early ’30s | August 1929 | March 1933 | 3 years, 7 months |
The Great Recession–aka The 2008 Financial Crisis | December 2007 | June 2009 | 1 year, 6 months |
The Early ’80s Recession | July 1981 | November 1982 | 1 year, 4 months |
The Mid-’70s Recession | November 1973 | March 1975 | 1 year, 4 months |
The Great Depression–Late ’30s | May 1937 | June 1938 | 1 year, 1 month |
The Late ’60s Recession | December 1969 | November 1970 | 11 months |
The Late ’40s Recession | November 1948 | October 1949 | 11 months |
The Early ’60s Recession | April 1960 | February 1961 | 10 months |
The Mid-’50s Recession | July 1953 | May 1954 | 10 months |
Recession of 2020 | February 2020 | May 2020 | 3 months |
The recession of 2020, was the shortest and steepest in U.S. history and marked the end of 128 months of expansion.
Key Predictors, Indicators and Warning Signs
When searching for predictors and indicators of a recession, you’re likely to get myriad answers on what they actually are. Of all possible causes, you’ll likely hear the term “inverted yield curve” the most.
What Is a Yield Curve?
If the Pumpkin Spice Latte is the harbinger of autumn, the inverted yield curve is the harbinger of another recession. At least, that’s what some speculative economists will have you think.
The most recent yield curve inversion began on April 1, 2022, and it has only gotten stronger through the first quarter of 2023. A yield curve inversion is defined as when interest rates flip on short- and long-term U.S. Treasury bonds, with short-term yields exceeding those on longer-term bonds.
Other Indicators of a Recession
Besides the inverted yield curve, there are other signs of a recession. John Hilsenrath, a Wall Street Journal senior correspondent, explained some potential recession indicators on the publication’s podcast, The Journal. Among them are:
Excessive spending: For the Great Recession, this would be the housing bubble; in the early 2000s, the tech bubble.
Shocks to the system: In 2008, this was the collapse of Lehman Brothers, and in the early ’90s, it was the oil price spike.
The Fed hiking interest rates: To try to curb inflation, sometimes the Fed will raise interest rates.
Other indicators could be a contraction of the stock market. The big market selloff of 2022, which reached bear market status, was seen by some as a predictor of a recession in 2023, as the stock market typically looks forward about six months.
What Does a Recession Mean for You?
People of different economic backgrounds will experience the pains of a recession in different ways. Some general things will happen: Unemployment will rise, the GDP will shrink and the stock market will suffer. But a recession could have much more serious consequences for an unemployed single mother of two than it might for a young, employed professional with no dependents.
No matter what your situation is, there are a few things you should know to prepare for the next slowdown in economic growth.
How Can You Mitigate Potential Loss?
If you are very concerned about a recession, and you feel that your short-term investments might not survive a bear market, you could move some of your investments to long-term CDs, high-yield savings accounts or just hold on to the cash. But if you have a diverse long-term investment portfolio, it should be built to weather both bull and bear markets.
What Does a Recession Mean for Your Employment?
During a recession, unemployment rises. That means that some parts of the workforce will be affected by the next recession. There’s no easy way to determine if you will lose your job during a recession. It’s helpful to look at:
The financial state of your company.
Your company’s investment in you as an employee.
Your job stability — can you be replaced?
Your field — industries like utilities, low-cost retail and consumer staples have a strong record of weathering recessions well.
What Does It Mean for Your Investments and Retirement Funds?
Learn from a big mistake some investors made during the Great Recession: They sold their stocks when they were plummeting, as did many investors when the market crashed in March 2020, only to miss the April recovery. Your long-term investment strategy should already have recessions and bear markets built into it, anyway. If you hold on to your investments long enough, they will eventually recover and be worth more in the long run.
The Bottom Line
There’s nothing you can do to avoid a recession, but it’s smart to get your money in order while the economy is doing well. Understand that the economy goes through phases of expansion and contraction. Being diligent about saving and investing during the good times — and the bad — can help you be financially successful in the long term.
FAQ
Here are the answers to some of the most frequently asked questions about recessions.
What does a recession do to the average person?
Recessions impact everyone differently but generally, unemployment will rise and the stock market will suffer.
Do prices go down in a recession?
Yes, typically home values and prices in general for household goods will go down during a recession.
What's the best thing to do in a recession?
Many people might sell their stocks while they are plummeting during a recession, but if you hold on to your investments long enough, they might eventually recover and be worth more in the long run.
Where do you put your money during a recession?
During a recession, you could move some of your investments to long-term CDs with fixed rates, to a high-yield savings account or just hold on to your cash.
Andrew Lisa, John Csiszar and Gail Kellner contributed to the reporting for this article.
Information is accurate as of March 15, 2023.
This article originally appeared on GOBankingRates.com: Recessions Explained: Definition, Warning Signs and What Happens During One
