Key takeaways
- During a recession, the entire economy is down, and everyone feels the impact in one way or another.
- With less money in circulation, the unemployment numbers rise, leaving many folks without work and decreased spending.
- The NBER hasn’t officially declared a recession yet, and many experts can’t agree on when one will be announced.
We keep hearing that a recession is looming, but there still hasn’t been an official announcement, even though early this summer the U.S. experienced 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 scorekeepers of the recession are the economists at The National Bureau of Economic Research (NBER). There’s no official threshold for a recession, but the NBER will look at GDP growth, real personal income (RPI), labor statistics and consumption to track how the economy is performing overall.
However, the concerns of a pending 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 yourself for what’s to come.
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When will a recession be announced?
When an official recession is announced, the overall economy is shrinking and there is a period of significant economic decline. Economists look at various factors before declaring a recession and don’t consider difficult times to be a benchmark.
However, we can’t deny that negative GDP growth matched with soaring inflation leaves most of us losing confidence in the economy. The resilient labor market has propped up the economy for some time, with the unemployment rate at 3.5% as of September 2022. This, along with strong household savings, has kept the economy going since people are still spending money.
While we’re not officially in a recession just yet, many experts feel that one will happen, but they just can’t agree on when it will officially be announced. All of this uncertainty has sparked fears over what to expect in the coming months as households continue dealing with the rising cost of everyday items.
What does a recession mean for the average person?
We will break down how a recession impacts the average person so that 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 since high unemployment numbers signify and correlate with a shrinking economy. When consumer spending goes down, it forces businesses to adjust operations, so they may have to lay off staff to match the decrease in 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 wage cuts, reduced hours and the possibility that companies won’t be as willing to offer bonuses and other financial incentives. Companies are also reluctant to bring on new hires during a recession, so it would be challenging to find a new job 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 from your employer, putting your family in a difficult position as you would have to shop around to find new coverage. The loss of health insurance also could lead to increased spending since you would have to spend more money out of pocket on medical emergencies and medication.
A recession causes the stock market to drop
Consumers will decrease their spending, putting less money into the economy, which means that companies will report lower earnings. To make matters worse, some investors will liquidate their stocks in response to recession fears, rising inflation and interest rate hikes. If you are looking to retire shortly or cash out of the stock market to pay for a major expense (like a wedding or a new home purchase) you might be waiting much longer than anticipated.
A recession means that everything’s more expensive
A recession is often caused when interest rate hikes are used to slow down the economy due to rising inflation. As we’ve seen in 2022, the prices of everything around us have increased, and people are spending more on essentials (rent, electricity, food) than ever before. With rising prices due to inflation, your money doesn’t go as far, so you’re unable to maintain the same quality of life.
In a recession, you’ll struggle to save money due to your decreased purchasing power. When you can’t save as 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 the cost of food will make you think twice before spending money.
A recession means higher interest rates
The Fed raises interest rates to cool off the economy, making the cost of borrowing money more expensive. Higher interest rates mean you have to spend more money on your current debt, and you’re going to think twice before acquiring new debt.
Your credit card balance will now come with higher payments, but your mortgage payments will stay the same if you have a fixed rate mortgage. Many households are already stretched thin with living expenses, so spending more on credit card debt would take away from other areas of Americans’ budgets. Higher interest rates could also put plans for home renovations and memory building vacations on hold.
A recession impacts your ability to get a loan
Even if you still want to borrow money despite higher interest rates, lenders will think twice before loaning money during a recession since they will factor in your job security when it comes to the approval process. The difficulty of getting approved for a loan could force you to put off a major purchase, like getting into the real estate market or buying a new vehicle. This could also set you back in life as you have to wait to make a major purchase that would help you transition to the next stage of adulthood.
How can you prepare for a possible recession?
While there are no benefits to being in a recession, it doesn't mean we have to panic, as this is a normal part of the economic cycle. We have to do whatever we can to be prepared for a possible recession, as we don’t know how it will affect us until it happens. Here’s what you can do right now to prepare for a possible recession:
- Start paying down your debt. That credit card balance will cost you more when interest rates rise, so you want to get aggressive about paying it off.
- Save up an emergency fund. You want to save at least three months’ worth of living expenses in the event of a job loss so that your bills are still covered, and you have enough money to get by.
- Diversify your income streams. During a recession, relying on one source of income is risky, so you may want to look into a side hustle or find an additional part-time job to protect yourself.
- Look for a recession-proof career. If your industry depends on a strong economy, this would be the ideal time to consider making a career switch. You may also want to freshen up your resume and reach out to your network so that you’re ready to make such a move.
How should you invest?
In volatile times, the market reacts to any kind of news, so you can expect major fluctuations that are difficult to weather as you watch your portfolio slide. During a recession, there’s less money circulating in the economy and the stock market is down.
Inexperienced investors will sell off stocks due to uncertainty caused by rising inflation. People want more cash and safety, so they start pulling out of the stock market, causing share prices to plummet further. It’s a vicious cycle that’s very difficult to watch unfold in real time.
You can make your portfolio more defensive for handling uncertain times so that you’re ready 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 industries you invest in.
The bottom line
A recession will impact all of us in one way or another, but it doesn’t mean we should stress more than we need to about it, or overreact to the falling market. A little preparation upfront can go a long way in helping you through the worst-case scenario if it does happen. We still don’t know if a recession will be announced as the Fed still has two more meetings to go in 2022, where they will be paying close attention to the economy to see if rate hikes should continue.
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