What is a recession and what might it mean for me?
Friday, 22 May 2020
The coronavirus pandemic has sparked a collective concern about the potential for an impending recession.
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, but with more than 33 million Americans filing for unemployment and the U.S. economy shrinking by nearly 5% in the first quarter of 2020, it’s no wonder there is cause for concern.
The National Bureau of Economic Research (NBER) notes when these downturn cycles start and stop by looking at data from the last month or quarter. They examine 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?
Generally speaking, 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.
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