Recession 101: A beginner's guide to economic downturns

Welcome to Recession 101, a beginner’s guide to economic downturns. If you’re new to the concept of recession, don’t worry – you’re not alone. In this article, we’ll break down the basics of what a recession is, how it’s measured, and how it can affect you and the economy as a whole. Whether you’re a student, a small business owner, or just interested in understanding more about the economy, this guide is for you. Let’s get started!”

What is a recession?

A recession is a period of economic downturn or decline characterized by reduced economic activity, high unemployment, and falling prices. It is a natural part of the business cycle and typically follows a period of economic expansion. During a recession, businesses may experience reduced sales and profits, leading to layoffs or job losses, and consumers may cut back on spending, reducing demand for goods and services. This can create a downward spiral of reduced demand, job losses, and struggling businesses. Governments and central banks often take action to mitigate the impact of recessions and support economic recovery through monetary and fiscal policy measures and liquidity to financial markets.

A recession is a significant, widespread, and prolonged downturn in economic activity. A recession is often defined as two consecutive quarters of negative gross domestic product (GDP) growth. GDP is a measure of the total value of goods and services produced in an economy over a given period of time. When GDP decreases for two consecutive quarters, it is generally considered an indication that the economy is in a recession. However, it is important to note that there are other factors that can be taken into account when determining whether or not an economy is in a recession, and more complex formulas may also be used.

Are we in a recession in 2023?

The economy has not been in a recession in 2022. A recession is typically defined as a period of economic downturn or decline characterized by reduced economic activity, high unemployment, and falling prices. While the economy may have experienced some slowing in 2022, it has not met the conventional benchmark of two consecutive quarters of economic contraction, which is often used as a definition of a recession. It is important to note that a variety of factors can influence the state of the economy, and it is not uncommon for the economy to experience ups and downs over time.

it is possible that a recession could begin in late 2023 or early 2024. However, it is important to note that predicting the timing of a recession is inherently difficult, and many factors can influence the economy’s state. As a result, it is important to take any forecast or prediction with a grain of salt and to be prepared for the possibility of economic downturns at any time. It is always a good idea for individuals and businesses to have a plan in place to weather any economic challenges that may arise.

Probability of US Recession 2023

It is important to note that economic forecasts, including recession probability models, are not certainties. They are based on a variety of economic indicators and assumptions about future economic conditions and are subject to change as new information becomes available. It is also worth noting that recessions are a natural part of the business cycle, and economies generally recover from them over time.

In the case of the US, the Federal Reserve has a number of tools at its disposal to help mitigate the impact of a recession and support economic recovery. These tools include setting interest rates, implementing monetary policy, and providing liquidity to financial markets.

It is also important for individuals and businesses to be prepared for economic downturns by having a financial plan in place, including saving for emergencies, managing debt, and diversifying investments.

According to the calculation, it is a 96%: Probability of a US Recession in 2023

It has been suggested that there is a high likelihood, approximately 70%, of a recession occurring in the US in 2023, according to some economists.

Please note that we cannot confirm this claim’s accuracy as I do not have access to current economic data or the views of individual economists. It is generally difficult to predict the timing and severity of a recession, as there are many factors that can influence the state of the economy. As a result, it is important for individuals and businesses to be prepared for the possibility of economic downturns and have the plan to navigate any challenges that may arise. Suppose you have specific concerns about the potential for a recession in 2023. In that case, consulting with a financial advisor or economist for more up-to-date and personalized guidance may be helpful.

What happens during a recession?

During a recession, economic activity slows down or declines. This can manifest in a variety of ways, including:

Reduced Sales and Profits: Businesses may experience a drop in sales, leading to reduced profits and potentially even losses. This can lead to layoffs or job losses as businesses try to cut costs.
High Unemployment: As businesses struggle and reduce their workforce, unemployment rates may rise.
Falling Prices (Deflation): A recession may also be accompanied by falling prices, also known as deflation. This can occur because of reduced demand for goods and services, which can lead to price cuts by businesses in an effort to attract customers.
Reduced Consumer Spending: During a recession, consumers may cut back on spending due to economic uncertainty or decreased income. This can lead to a reduced demand for goods and services, which can further contribute to the economic downturn.
Decreased Investment: Businesses may also reduce their investment in new projects or expansion during a recession as they become more cautious about spending.
Increased Government Intervention: Governments and central banks may take action to try to mitigate the impact of a recession and support economic recovery. This can include implementing monetary policy (such as lowering interest rates), implementing fiscal policy (such as increasing government spending or providing tax breaks), and providing liquidity to financial markets.

Some sources you may find helpful:

The Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/RECPROUSM156N
The International Monetary Fund: https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022
The World Bank: https://www.worldbank.org/en/news/press-release/2022/09/15/risk-of-global-recession-in-2023-rises-amid-simultaneous-rate-hikes
The Organization for Economic Cooperation and Development: https://www.oecd.org/newsroom/global-economy-faces-a-tightrope-walk-to-recovery.htm
The Congressional Research Service: https://crsreports.congress.gov/product/pdf/IN/IN10853

How to Prepare for Recession?

There are a number of steps that Americans may take to prepare for a possible recession, including:

Building an emergency fund: Having a financial cushion in the form of an emergency fund can help individuals and families weather unexpected financial challenges, such as job loss or a decrease in income. It is generally recommended to have enough money saved to cover at least three to six months’ worth of expenses.
Reducing debt: Paying off high-interest debt, such as credit card balances, can help reduce financial strain during a recession.
Building up savings: Increasing the amount of money saved in a savings account or other low-risk investment can help provide financial security and stability during a recession.
Diversifying investments: It can be helpful to diversify investment portfolios to spread risk and protect against potential losses in a recession.
Staying informed: Keeping up to date on economic developments and staying informed about potential risks can help individuals and businesses make informed decisions about financial planning and preparedness.
Building up skills: Developing new skills or enhancing existing ones can help individuals increase their employability and marketability in the event of job loss or a decrease in income.
Reviewing financial plans: It can be helpful to review financial plans and budgets to ensure they are realistic and make any necessary adjustments to prepare for a possible recession.
Seeking professional advice: Consulting with a financial advisor or another professional can provide personalized guidance and help individuals and businesses develop a plan to weather any financial challenges that may arise during a recession.

What to Invest in During a Recession

it is generally suggested that investors consider becoming more aggressive during a recession, as this can involve ramping up exposure to assets that may offer potentially higher returns. The rationale for this approach is that after stocks have fallen, investors are paying a lower price for the future growth of those businesses, which can be a good opportunity to buy low and sell high. However, it is important to remember that this approach involves taking on more risk, and there is no guarantee of success. Investors should carefully consider their financial situation and risk tolerance before making investment decisions.

During a recession, it may be advisable for investors to consider investments that are less sensitive to economic conditions and may offer the potential for stable or even growing returns. Some investments that may be more suitable during a recession include:

Treasury bonds: Treasury bonds are issued by the US government and are generally considered to be a safe investment, as the full faith and credit of the government backs them. While they may offer lower returns than other types of investments, they can provide a stable source of income during a recession.
Dividend-paying stocks: Stocks that pay dividends can provide a steady stream of income even if the stock market is experiencing a downturn. Companies that have a long history of paying dividends may be more likely to continue doing so even during a recession, making them a potentially more stable investment option.
Blue-chip stocks: Large, well-established companies with a strong track record of financial stability, also known as “blue-chip” stocks, may be more resistant to economic downturns and may offer the potential for long-term growth.
Gold: Gold has traditionally been seen as a safe haven asset during times of economic uncertainty, and may be a good option for investors looking to diversify their portfolio and potentially protect against losses during a recession.

It is important to note that these are just a few examples, and the best investments for an individual will depend on their specific financial goals and risk tolerance.

Investments to Avoid During a Recession

During a recession, avoiding certain types of investments that are more vulnerable to market downturns may be advisable. Some investments that may be riskier during a recession include:

Leveraged investments: Investments that involve borrowing money to amplify potential returns, such as leveraged ETFs or margin accounts, can be particularly risky during a recession, as they can magnify losses if the market declines.
High-yield bonds: High-yield, or “junk,” bonds are bonds issued by companies with lower credit ratings and offer higher interest rates to compensate for the added risk. However, during a recession, these companies may be more vulnerable to default or financial distress, which can lead to losses for investors.
Risky stocks: Stocks highly sensitive to economic conditions, such as those in sectors prone to downturns during a recession, may be riskier during a recession. This can include stocks in industries such as real estate, retail, and leisure, among others.

It is important to note that these are just a few examples. The best investments for an individual will depend on their specific financial goals, risk tolerance, and overall financial situation. It is generally recommended that investors consider seeking professional financial advice to determine the investments that are most appropriate for their needs.

How Does A Recession Affect Me?

A recession can affect individuals in a variety of ways, depending on their specific circumstances. Some common ways that a recession may impact individuals include:

Employment: During a recession, businesses may experience reduced sales and profits, leading to layoffs or job losses. This can result in increased unemployment and may make it more difficult for individuals to find employment.
Income: A recession can also lead to a decrease in income for those employed, as businesses may cut back on wages or hours to reduce costs.
Spending: Consumers may cut back on spending during a recession, reducing demand for goods and services. This can result in businesses struggling to stay afloat, potentially leading to further job losses.
Savings: A recession may also impact individuals’ ability to save money, as reduced income and increased unemployment can make it more difficult to set aside money for the future.
Investment returns: A recession can also affect the value of investments, as stock prices and other asset values may decline during a downturn.

It is important to note that the impact of a recession on an individual will depend on their specific circumstances and financial situation. Some individuals may be more vulnerable to the effects of a recession, such as those with lower income or savings, while others may be better able to weather financial challenges.

How Long Do Recessions Last?

Recessions tend to be relatively short-term, with a typical duration of around 10 months.

According to the capital group’s recession analysis, recessions have persisted for anywhere between two and 18 months in the past 11 cycles since 1950, with the average spanning about 10 months. It is important to note that the length of a recession can vary significantly and is influenced by a range of factors, including economic conditions, monetary and fiscal policy, and other external factors. It is also worth noting that recessions can have varying impacts on different sectors and regions, and the length and severity of a recession can vary from one cycle to the next.

Recessions are typically characterized by a decline in economic activity, including reduced output, employment, and trade. While the NBER generally uses a decline in GDP as one indicator of a recession, it also considers other factors, such as employment, industrial production, and wholesale and retail sales.

The length of a recession can vary widely, with some recessions lasting only a few months and others lasting for several years. According to the NBER, the length of recessions in the United States since World War II has ranged from six months to 18 months. However, it is important to note that a variety of factors can influence the length of a recession, and there is no set formula for determining how long a recession will last.

The Aftermath of a Recession: Economic Recovery and Expansion

After a recession, the economy typically begins to recover and grow again. This process is known as economic expansion. During an expansion, businesses and industries may see increased demand for their products and services, and employment levels may rise. Inflation may also start to increase as the economy grows and the demand goods and services increases. It is worth noting that the recovery process can take some time and may not happen evenly across all sectors and regions. Some industries and areas may recover more quickly than others, and there may be fluctuations in economic growth and activity during the expansion phase.

Recessions can create opportunities for businesses and individuals in a number of ways. For businesses, recessions can present opportunities to acquire distressed assets at discounted prices and enter new markets or expand into areas where competition may be less intense. For individuals, recessions can create opportunities to learn new skills or pursue an education that may lead to new career paths. Additionally, recessions may also lead to the creation of new businesses or industries as entrepreneurs identify and seek to meet unmet needs or seize upon new opportunities in the market. It is important to note that while recessions can create opportunities, they can also present challenges and risks, and it is up to individuals and businesses to carefully consider the potential benefits and drawbacks of any given opportunity.

Here is a list of potential opportunities that individuals may have after a recession ends:

Pursuing education or training to improve skills and qualify for new job opportunities.
Starting a business or investing in a new venture.
Seeking out new job opportunities in growing industries or sectors.
Negotiating for a promotion or salary increase within a current job.
Participating in internships or temporary work to gain experience and build a network.
Taking on freelance or contract work to supplement income or gain experience in a new field.
Investing in stocks, real estate, or other assets that may be undervalued during a recession.
Negotiating lower rent or mortgage payments to save money during a downturn.
Downsizing to a smaller home or apartment to reduce living expenses.

It’s important to remember that specific opportunities will depend on an individual’s skills, interests, and circumstances. To help identify and pursue new opportunities, it may be helpful to use resources such as job search websites, networking events, and business incubators.

In conclusion, recessions are a normal part of the economic cycle and can have significant impacts on individuals, businesses, and societies. It is important for individuals and businesses to be aware of the potential risks and challenges that may arise during a recession and to take steps to prepare for and mitigate those risks. At the same time, recessions can also create opportunities for businesses and individuals to acquire distressed assets at discounted prices, enter new markets, invest in new ventures, or pursue education and training that may lead to new career paths. As with any economic event, it is important to stay informed, be adaptable, and carefully consider any given opportunity’s potential risks and rewards.