Whether we're in a recession now, or will be sometime in 2023, a recession is an imminent reality, most economists agree. This post explains all the wonky details about how economists decide whether we are in a recession, but you are likely wondering normal, human questions like:
How does a recession affect the average person?
What happens to prices during a recession? What happens to my money?
And … of course:
How does a recession affect me?
Keep reading to learn what you need to know about the impacts of a recession on you, your family, and your money:
- How a recession is likely to affect you
- What happens to your money in a recession
- What happens to prices in a recession?
- What happens to jobs in a recession?
How does a recession affect me?
In general, everyday people can expect the following in a recession:
- More layoffs, less hiring, fewer pay raises and bonuses
- Higher interest rates, including for mortgages and car loans
- Lower prices for homes and cars
- Stock market investments decreases
- Interest rates on savings increases
This Wall Street Journal video explains why a 2023 recession would be unique in history:
This video explains why this unique, post-pandemic economy is so unique, with very low unemployment rates, very high inflation, high corporate profits and cash, and declining economic activity (GDP) — all challenging common understandings of how economics and recessions work.
What happens to your money in a recession?
Stock market investments tend to decrease during a recession — which can pose a good opportunity to buy.
Prices tend to stay at higher, pre-recession rates during a recession.
Higher mortgage rates mean that housing payments can be more expensive, though the recent very competitive real estate market will likely cool, so the purchase price may be more affordable for buyers. However, with higher unemployment, fewer people will be shopping for, or be able to afford to buy a home.
Similarly, supply chain and inflation-related high car prices will cease and drive down purchase prices for new and used vehicles. However, higher interest rates mean that car payments will be less affordable.
What happens to prices in a recession?
Prices during a recession tend to hold steady — which doesn't seem to make sense since prices increase during good economic times, as inflation is a result of more consumer demand. Economists call prices “sticky” in that they don't go down with the economy, but stick to = rates that grew with inflation pre-recession.
Sticky prices are linked to sticky wages, as companies find it very difficult to cut workers' pay. However, layoffs are more common during recessions.
What happens to jobs in a recession?
Recessions and unemployment are tightly linked during a recession — there are more layoffs during a recession, and it will take employees longer to find a new job once they are laid off. Pay raises and bonuses are more scarce during a recession.
Poorer people spend less money, which hurts companies' profits, which leads to more layoffs — the recession cycle continues.
What to do: Research the types of jobs available, invest in a side gig, a recession-proof business or one of these recession-proof jobs.
Read our guides on 30 high-paying careers for moms, and good jobs that do not require a degree.
What happens to your 401k and stocks in a recession?
Stock and equity investments tend to tank just before a recession — one of the leading indicators that an economy is headed into the red.
The S&P 500 rose an average of 1% during all recession periods since 1945.
Stock markets typically decline sharply for several months during a recession, bottom out about six months after the start of a recession and rally before the economy picks up. This article's graphs and charts give more details.
What to do: Unless you are a day trader or quantum computer, hold steady in your long-term investment strategy to build wealth. If you happen to have a chunk of cash sitting around, investing in a diversified, target-date index fund during a down market can reap rewards long-term.
In other words: if you can, buy low, sell high.
After all, rich people typically find ways to make money in a recession.
What happens to interest rates in a recession?
Interest rates tend to be high just before a recession, as the Federal Reserve intentionally sets higher rates in order to discourage wayward consumer spending in an effort to stave off that recession. Rates at the beginning of a recession will lower as the Fed tries to invigorate the economy, and lift as we move out of a recession in months ahead.
What to do: Avoid taking on variable-interest debt, including an ARM mortgage, line of credit, or any credit card or personal loan in which rates will fluctuate. If you already have one of these types of loans, research refinancing them now to a fixed-rate loan — especially if you fear losing your job, which would make a re-fi difficult.
You can also use this time of higher APRs to stash your cash in a CD, money market account, or high-interest savings account >>
What happens to housing prices during a recession?
While home prices tend to stabilize or even decrease during a recession, the higher interest rates before a recession sets in mean the overall cost of home ownership will likely go up during a recession — though rates tend to fall early in a recession, and raise as the recession lifts.
Recessions mean higher unemployment and lower consumer confidence, so demand for housing will be lower. This is a positive if you are buying a home, but a negative if you are selling your house.
Other home-ownership expenses like repairs, renovations and taxes do tend to stabilize during a recession, which can offset higher mortgage rates.
What to do: Because mortgages will be less affordable, you may consider investing in a rental property. If you are thinking of buying a new home, it may make sense to wait until interest rates decrease again.
What happens to car prices during a recession?
Car prices tend to decrease during a recession, as more people hold on to their vehicles and invest in repairing older cars and trucks, rather than buy new. Many people will sell second vehicles, be less likely to invest in any big purchase, and perhaps trade in for more fuel-efficient cars.
Higher interest rates will increase the monthly payments of car prices, however, as will any increase in gas prices.
However, the new and used car shortage that lingers after the pandemic supply-chain issues will likely be relieved, helping to drive down car prices.
What to do: If you can wait, especially if you can buy cash, you may consider waiting until a recession to buy your next car. Or, if you must finance, you might buy sooner than later while car loan rates are still relatively low.
How to get free car as a single mom
How does a recession affect healthcare?
When people are broke, or worry about their financial security, they are less likely to schedule elective or even necessary procedures, less likely to schedule routine medical care, and less likely to pay their bills.
This affects people's well-being and increases the chances of more severe — and expensive — health issues. All of these recession trends, along with slashed government budgets, means that the healthcare industry will struggle financially and in its ability to serve communities.
These pressures mean that health insurance is ever-more important, harder to afford, and more expensive and less rich for the everyday person during a recession.
How to become a home health aid
How to become a medical biller and coder
How to get free prescription drugs, free prescription glasses and free dentures
Bottom line: Here’s what a recession does to the average person like you and me.
A recession is a financial stress for most average people: Higher chance of unemployment, higher interest rates, though steady cost of goods, and often lower home and car prices.
There are opportunities for investments during a recession, though you should expect your retirement fund to go down — including learning to live more frugally, starting a business during a time of less competition, invest in homes or stocks that are down.
12 free printable budget worksheets and Google Sheets templates
In general, everyday people can expect the following in a recession: more layoffs, less hiring, fewer pay raises and bonuses, higher interest rates, and more.
Stock market investments tend to decrease during a recession — which can pose a good opportunity to buy. Higher interest rates mean that near-zero APRs on savings accounts and CDs are over, and you may earn 2 to 3% on your cash savings.
Prices during a recession tend to hold steady — which doesn't seem to make sense since prices increase during good economic times, as inflation is a result of more consumer demand. Economists call prices “sticky” in that they don't go down with the economy, but stick to = rates that grew with inflation pre-recession.
Recessions and unemployment are tightly linked during a recession — there are more layoffs during a recession, and it will take employees longer to find a new job once they are laid off. Pay raises and bonuses are more scarce during a recession.
Stock markets typically decline sharply for several months during a recession, bottom out about six months after the start of a recession and rally before the economy picks up.
Interest rates tend to be high just before a recession, as the Federal Reserve intentionally sets higher rates in order to discourage wayward consumer spending in an effort to stave off that recession. Rates at the beginning of a recession will lower as the Fed tries to invigorate the economy, and lift as we move out of a recession in months ahead.
Recessions mean higher unemployment and lower consumer confidence, so demand for housing will be lower.
Car prices tend to decrease during a recession, as more people hold on to their vehicles and invest in repairing older cars and trucks, rather than buy new.
When people are broke, or worry about their financial security, they are less likely to schedule elective or even necessary procedures, less likely to schedule routine medical care, and less likely to pay their bills.
