What A Recession is and How to Tell if We’re in One
“Recession” is a word on everyone’s lips these days. Are we heading for one, or are we in a recession? If we are, what can we do to mitigate the damage?
Talk of a recession is nothing new. In fact, people tend to toss the word around every couple of years. But with the recent stock market dip and ongoing inflation, experts and consumers have both been wondering, are we in a recession? Let’s talk about it.
Are We in a Recession?
While many economists define a recession as two straight quarters of negative gross domestic product (GDP) growth, the official definition comes from the National Bureau of Economic Research (NBER). The NBER defines it as “significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Unfortunately, the NBER waits until all data is in before making a determination. That means a recession is typically declared retroactively. In other words, we won’t know if we’re officially in a recession until after the fact.
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What Causes a Recession?
No single event can answer the question “Are we in a recession?” It’s often a combination of factors. Below are some of the most common causes.
1. Economic Shocks
Sudden unexpected events can contribute to a market shift. One of the best examples of this was the COVID-19 pandemic, which caused global shutdowns and industry disruptions.
2. Rising Interest Rates and Inflation
When the cost of goods and services increases, the Federal Reserve may raise interest rates to slow down spending. The goal of this is to influence businesses to lower those costs, which tends to encourage shoppers to start spending again.
3. Market Crashes and Bubbles
In 2008, issues in the housing market led to a massive U.S. financial crisis that lasted for 18 months. When an industry sees a steep increase, this can be known as a “bubble,” and the bubble can sometimes lead to a market crash that spirals us into a recession.
4. Deflated Consumer Confidence
While recessions typically follow market disruptions, often they’re driven by consumer behavior. As R.J. Weiss, founder at The Ways to Wealth, points out, this process tends to become a self-reinforcing feedback loop based on how people feel.
“When people are feeling good, they tend to spend more, produce more and take more risks,” Weiss said. “All these things can help the economy grow. When people are pessimistic about the future, they tend to spend less and stick to the status quo.”
5. Declining Business Investments
Businesses play a large role in keeping the economy strong. When employers reduce hiring or cut back on purchases, it can lead to a recession.
Weiss said while unemployment usually increases during a recession, often data doesn’t account for underemployment. Salaried employees may remain employed but at a much lower wage, or a salesperson may see lower commissions based on spending cutbacks.
“This is where most people feel the hit the most, and at the end of the day, losing income is often the biggest risk someone is facing,” Weiss explains. “And, when they don’t have confidence that their future is going to be better than their past, they start making decisions like spending less.”
6. Trade Disruptions
The U.S. economy relies heavily on trade activity, so disruptions can lead to a recession. International conflicts, supply chain issues and a decline in exports for any reason can lead to a recession.
How Does a Recession Impact Everyday Life?
Recessions can affect every aspect of your life, from when you choose to move to how you save for retirement. Here are some of the top ways a recession might impact your everyday life.
1. Income Reduction
One of the most devastating events that can happen during a recession is a job loss. When the economy gets rough, companies often cut staff, lower wages or reduce the hours that employees work. If you lose your job, you may find it tougher to replace it.
“Jobs will start to be harder to come by in a recession,” Paul Gabrail, founder and host at Everything Money, cautions. “That’s the biggest disruption. However, that will pass.”
2. Lowered Credit Limits
Banks and credit unions worry about economic uncertainty, too. They may be stingier about lending or even lower credit limits. This can impact revolving lines of credit like credit cards.
“Remember credit card companies can lower limits or close a credit card on a unilateral basis,” debt and bankruptcy attorney Ashley Morgan said. “This can result in a drop in your credit score. It also can mean if you were relying on an open line of credit to survive, you may not have that option in the future.”
3. Declining Investments
As the economy tightens, people may be more conservative with investments. This can keep retirement accounts and college funds from growing. At the same time, a recession typically includes stock market downturns, which means individual shareholders may see their savings depleted. Usually, though, this corrects itself once the economy improves.
4. Reduced Customer Spending
Even without job loss, many consumers may pull back on spending. They may feel nervous about making purchases, especially when it comes to big-ticket items. As Gabrail points out, even a small reduction in spending, when spread over a large swath of the population, can have an impact.
“Consumer spending is 70% of GDP,” Gabrail said. “So when consumers pull back, naturally that has implications on the economy and is going to cause issues.”
Are We In a Recession or Not?
No reliable resource has declared a U.S. recession, and even the experts say it’s tough to say definitively we’re at the start of one. It remains a possibility, though. Weiss said one of the major issues the economy faces right now is uncertainty.
“Both individuals and businesses are very uncertain right now about policies and the future direction,” Weiss said. “And, when someone is uncertain and doesn’t have confidence, they start displaying behaviors, such as reducing spending or foregoing investments, that could put us in a recession.”
How to Prepare for a Recession
Going through a recession is tough, but a few steps can help you survive. Whether we’re heading toward one or not, it can’t hurt to prepare. An emergency fund can help you survive economic downturns and unemployment, and reducing unnecessary debt can alleviate some of the pressure that comes when finances are tight.For more information on preparing for a recession, check out our list of tips.
Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.
