What is a recession and what might it mean for me?
Monday, 21 October 2019
A recession is when the economy slows down for at least six months.
That means there are fewer jobs, people are making less and spending less money, and businesses stop growing and may even close. Usually, people at all income levels feel the impact.
Most of the time, we don't know we're in a recession until after it's been going on for awhile. The National Bureau of Economic Research (NBER) notes when these cycles start and stop by looking at data from the last month or quarter. They look at things like average income, unemployment figures and retail sales. They also look at gross domestic product (GDP), which is the total value of all goods and services sold in the country during a specific period of time.
When these measures are declining, the economy is struggling. And when they keep going down for six months or more, that's a recession.
What causes a recession?
The country's progress can slow or stall for a number of reasons. One main reason is inflation. That's an increase in prices that means a dollar won't buy as much as it used to. When prices rise too fast or go too high, people and businesses stop spending as much. As a result, fewer goods and services are sold. Then businesses make less money, and they may lay off employees to cut costs.
Major events or crises, such as a hurricane or war, can also lead to a recession. That's because they may cause people to worry about the future and stop spending.
When interest rates get too high or the price of houses costs more than their actual value, that can also contribute to hard times. For instance, housing prices in many parts of the country were valued too highly in 2007, and contributed to the Great Recession.
How might a recession affect my life?
If we have a recession, it could mean you'll earn less money. Tough economic times usually create widespread layoffs. The types of jobs that are at greatest risk for going away include manufacturing, finance, construction, media and tech, according to USA Today. Jobs in healthcare, government and education are less likely to go away, but they may no longer offer raises and perks.
When people are out of work or making less money, they may not be able to pay their bills. This can cause people to go into debt or even lose assets such as their homes or cars. As people and businesses stop spending as much, the stock market also may have losses.
But recessions are generally short-term. While the Great Recession of 2008-2009 lasted 18 months and took years to recover from, most are milder. Aside from the Great Recession, the average length of a U.S. recession since 1945 has been about 11 months, according to NBER data.
Rather than worry about the chances of a recession, you can prepare yourself by paying off debt, saving money to build an emergency fund and adding a new income stream such as a side gig. Smart money management pays off, in good times as well as lean times. BBVA has more tips about recession-proofing your finances.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
Links to third party sites are provided for your convenience and do not constitute an endorsement. BBVA USA does not provide, is not responsible for, and does not guarantee the products, services or overall content available at third party sites. These sites may not have the same privacy, security or accessibility standards.
You may also be interested in:
Savings & Budgeting
Recession-proof your finances
The prospect of a recession can seem scary to anyone, but if you've taken appropriate steps to prepare your finances and yourself for a downturn, you can face the future with confidence.
Savings & Budgeting
Building an emergency fund
Do you have an emergency fund if the unexpected happens? Find out why you need one, how much to save, and tips for building your emergency savings fund.