In the TV show The West Wing there is a running joke that none of the staffers are allowed to say “Recession”. Like He-Who-Must-Not-Be-Named in Harry Potter, even uttering the word feels like it can bring down its wrath upon the country.
Instead, they referred to a recession as a “bagel.”
Photo by Nacho Díaz Latorre on Unsplash
However, I’m not a believer in avoiding scary ideas. I believe that by bringing things out into the light, we can make them less terrifying.
Here’s a quick rundown of some questions I’ve gotten about the possibility of a recession in this country:
What is a recession?
By definition, a recession is a contraction in the economy of a country. Usually this is measured by two quarters (two three-month periods) of a decrease in the Gross Domestic Product. Then the National Bureau of Economic Research (NBER) has to officially deem it a recession. The official determination could take between 4 and 21 months.
Why does it take so long?
When reports come out at the end of each quarter, it’s possible that they are incorrect. They might need to be revised, which will only happen as more accurate reports are compiled over time. NBER only makes the call once they are certain, so they don’t accidentally fan the flames of fear among investors.
Are we in one right now?
News organizations have started referring to the possibility of a recession. Indeed, the first two quarters of the year have so far recorded decreases in the GDP. However, we’d need to wait for the NBER to officially determine that we are in a recession.
What does a recession mean for people?
Recessions have happened throughout our history. As the economy shrinks, we typically see increased unemployment as employers have to cut back on expenses. At the same time, we also usually see people spending less as they adjust to decreased income.
This has the potential for a bad compounding effect as decreased spending means companies make less money, which leads to further layoffs. And further layoffs lead to even lower spending, which leads to… You can see the picture.
Recessions are nothing to be trifled with, but happen pretty regularly. Since 1857, they’ve occurred on average once every 3.25 years. On average, they’ve historically lasted about 10 months.
How do we get out of a recession?
The most effective ways for recessions to end is for the government to take some sort of action. In this case, the government’s goal is to increase spending, which can be done by lowering taxes, increasing stimulus, lowering interest rates.
Recessions are largely fueled by fear. President Roosevelt nailed it when he said “We have nothing to fear but fear itself.” Fear is what decreases spending, which increases layoffs. If everyone felt confident that the economy would turn around, they would spend money or invest it. All of the potential government steps seek to make people feel more comfortable spending money, which pulls the country out of the recession.
Should we worry about this recession?
The economy has seasons, just like nature. We don’t panic when winter arrives again, but we do need to prepare for it. Similarly, recessions will continue to occur in the future. They will always be uncomfortable, and we should always be prepared for the next one.
However, just like Spring is around the corner in the harshest of winters, we can expect that eventually the economy will turn around and boom.
It’s possible we’re already in a recession. Is this a reason to panic? No. In fact, those who can keep their wits about them now will be the ones who will come out ahead.
Instead of panicking, you should take this time to recession-proof your investments:
- Accurately determine your asset allocation so you can weather the ups and downs in the market.
- Build up enough cash to protect you from changes in income.
- Invest systematically to take advantage of when the stock market is down.
These are all valuable parts of a solid financial plan.
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