What Is a Recession?
The National Bureau of Economic Research says a recession happens when there’s a “significant decline in economic activity spread across the economy and lasts more than a few months.”
Economic growth is measured by GDP (gross domestic product), which is the total value of all the goods and services made and produced by the American economy. Normally, GDP grows little by little. Recession is just a big word to describe when GDP is negative for two quarters—or, in other words, GDP stops growing for six months.
Are We Going Into a Recession?
Recessions are kind of like tornadoes. It’s hard to predict when they’ll hit and how much damage they’ll cause. But instead of downed trees and smashed houses, the damage from a recession usually looks like this: lost jobs, a declining stock market and bankrupt businesses.
America’s last recession came and went super quick in 2020 when the whole world shut down in response to the coronavirus pandemic. The National Bureau of Economic Research didn’t even wait for two quarters of negative GDP growth to declare a recession.
Recessions are a natural part of the economy, so it’s a given that we’ll have them from time to time. We’ve actually had 12 recessions since World War II, and the average length of each was about 10 months.
So, the real question isn’t if we’re going to have a recession but when we’re going to have one, and that’s more difficult to answer. But we have seen some signs that a recession could be coming.
Sometimes the signs of recession are super obvious like the COVID shutdowns. But others are more subtle. People who study the economy for a living even disagree over when the U.S. will have its next recession.
We said earlier that a recession is usually defined as six months of falling GDP. So, here’s the bad news: GDP declined by 1.4% in the first quarter (aka first three months) of 2022.
Now, that might make you think, We’re halfway to a recession! Well, maybe . . . or maybe not. Other economic indicators like consumer spending and unemployment are still doing okay.
But then there’s the big thing on everyone’s mind: inflation. We’ve all felt the effects of higher prices, and that’s why the Federal Reserve has started raising interest rates to try to slow inflation. And in case you haven’t noticed, the stock market has been quite volatile lately. Wow, that’s a lot to worry about. But there’s always hope!
The important thing to remember is that no matter what the economy does, this economic trouble is temporary. If you’re reading this, you’ve lived through at least two recessions. And you made it!
How to Prepare for a Recession
With inflation up and our retirement accounts down, a recession feels more real now than ever. Having concerns right now is valid. But it’s important to not give in to all the fear out there. You should instead focus that energy on making sure your finances are where they should be.
At the end of the day, you need to have your own house in order and ready to stick it out during a recession. That’s going to matter a lot more than what’s happening on Wall Street or at the White House.
So, recession or not, the sentiment is still the same: Live on a budget, pay off debt, save for emergencies, invest for retirement, and live and give like no one else.
If You Have Debt . . .
If you have a steady job that’s secure right now, then keep working your debt snowball and paying extra on your debt just like you’ve been doing. Being debt-free will give you an overwhelming sense of freedom and peace. And when you aren’t spending most of your paycheck on debt payments, things like higher grocery prices—or a dip in the stock market—won’t hurt as much.
If you’re out of work or have a potential job loss on the horizon, go ahead and pause your debt snowball. Make sure you cover your Four Walls first—that’s food, utilities, shelter and transportation—and stockpile some cash. The most important thing is to take care of yourself and your family.
If You’re Investing for Retirement . . .
When the stock market goes down, you might be tempted to sell your mutual funds at a loss and put the money into something safe to weather the storm. But hold on, take a breath, and don’t do anything out of fear. We say it time and time again: Investing is a roller coaster ride, and you don’t want to hop off the coaster while it’s still going!
Instead, wait. Ride it out. Stocks rise and fall all the time. And even if you’ve seen a loss in your investments, you’ll only feel that loss if you take the money out. So don’t pull your money out right now. Keep your investments where they are, and wait for the upswing to happen.
Stocks are basically on a huge clearance sale right now. That means if you keep investing, you’ll be buying stocks at crazy low prices. And when the market picks back up (and it will), you’ll still be on that roller coaster, smiling as you see the big returns roll in from your “sale” stocks.
Above all, remember that investing for retirement is a marathon, not a sprint! And don’t pull your stocks out just because some dude on the news told you to do it.
Get Your Own Personal Economy in Order
Remember, a recession means the economy as a whole has been in a slump for six months or more. And at this point in the game, that hasn’t happened yet. But what is happening is your life. The money decisions you make every day impact you more than anything an economic expert could predict.
What have the last six months been like at your house? Think about it. Have your finances been in a recession of their own due to inflation or something else? If you’ve had a bad break, now is the time to really dig in and get serious. Don’t wait for a recession to hit before you get your money in order. Get intentional about how you handle your money now.
This commentary was originally posted by RAMSEY SOLUTIONS May 20, 2022
**Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.