Economic terms like a recession can seem like wonky jargon, but a severe economic downturn will likely have a real-life impact on your life.
What happens if we go into recession?
Here is what happens during a recession, how a recession affects you, and what you can do today to prepare for a recession, including securing your finances and career:
1. Prices increase
Consumer prices and inflation can increase for any number of reasons, and typically a combination of natural resources scarcity, supply chain issues, and typically interest rate increases. The U.S. Federal Reserve (and its counterparts globally) intentionally increase prime interest rates when they believe that consumer spending is getting out of hand — a way to reign in over-zealous purchases large and small.
Mid-December, 2022, the Fed enacted its third hike of the year, a 0.50 percentage point rate increase in an effort to tamp down runaway inflation without creating a recession, bringing prime rates to their highest level since 2018. More hikes are expected: The Fed expects the rate to end 2023 at a range of 5% to 5.25%.
This means that the cost of mortgages, car and other loans are increasing, your grocery and restaurant bills are up — but also that the demand for houses and cars is down as these big-ticket items are less affordable now.
2. Individuals spend less.
Consumer spending accounts for two-thirds of the U.S. economy, leading policymakers and economists to keep a close eye on any signs that people are shopping less, or shopping differently.
Common sense dictates that when individuals are worried about their jobs and investments, they spend less on everything from food, to new homes and cars, and discretionary items like travel, gifts, home furnishings, electronics and clothing.
While consumer spending has been strong over the past year, economists attribute most of that to inflation, which is hitting record levels of 9%, as well as ongoing supply chain issues for things like cars, which still struggle to keep pace with demand thanks to a semiconductor chip shortage.
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3. Businesses cut back spending in an effort to increase or maintain profits.
During a recession, the lower consumer spending means that businesses of all sizes have to find profit by lowering costs — and they already are, according to a survey by business finance software firm Ramp, released in July.
The small business spending on electronics dropped by 59% between May and June, 2022, with small businesses spending 28% less on shipping, 14% less on advertising and 11% on SaaS and software purchases over the same time period.
Lower business spending can impact your own company or employer if you sell to businesses. It also means that payroll expenses are at risk …
4. Hiring stops or slows, raises and bonuses are tightened.
When businesses suffer lower revenues and profits, worker pay is often the first to be scrutinized. Layoffs become more common and severe, and new hires earn less than before, and raises and bonuses tighten up.
The labor shortage of 2021-2022 meant that workers could reap an abundance of job offers, generous raises and unprecedented bonuses. Bureau of Labor Statistics report in January concluded employers’ compensation costs for all civilian workers, jumped 4% year-over-year during Q4 2021— the biggest increase in more than 20 years. These expenses for private companies grew by 4.5%.
The job market is showing signs of slowing, with applications for jobless aid for the week ending July 16 rose by 7,000 to 251,000, up from the previous week's 244,000, the Labor Department reported — up 50% from an all-time low in March, 2021.
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5. Governments have less tax revenue to invest in their communities.
Local, state and federal governments coffers depend on income, sales, business and real estate taxes. When individuals and businesses suffer, so, too, do their governments — and the community programs they support.
For example, even though there was a bump in federal and state subsidies for public school education during and immediately after the Great Recession of 2007-2009, by 2011, 17 states had cut education funding by more than 10 percent and local school districts cut teachers, librarians, counseling and other resources. When COVID hit in 2020, K-12 schools employed 77,000 fewer teachers and other workers even though they were teaching 2 million more children, and education funding in many states was still below pre-Great Recession levels, according to Census data.
5. Stock market suffers.
The stock market, government debt, and home prices all continue to suffer under these economic pressures. Consumer and investor confidence waivers and the stock market goes into a dive.
You may have noticed that your retirement or investment portfolio has been up and down dramatically over the last year. If you have a large stash of cash, you may consider waiting until a drop to buy equities, or at least spread your purchases over several months to reap the benefits of cost-averaging.
There have been 10 official U.S. recessions since the S&P 500 was established in 1957.
The worst S&P 500 decline was in 2010 during the Great Recession, when the index plunged 55% below its previous peak in March 2009. However, the average S&P 500 decline during post-World War II recessions is 29%.
Why do recessions happen?
A recession is a confluence of the above six forces, tipping each other off like a domino chain. Recessions typically happen about every 10 years, leading some economists to predict recessions as a normal part of the economic cycle.
Historically, other forces have contributed to recessions, according to Congressional Research Services:
- Slowed government spending after a war
- Overheated economy (a red flag that many economists are heeding now in 2023), in which consumer demand is stronger than supply, driving prices way up
- Implosion of an asset class — like the crash of the housing market in 2009, and the dot-com industry in 2001.
- Market shocks that rattle the economy, such as the effects dramatic oil price changes had during the Suez Crisis of 1956-57, the OPEC oil embargo of 1973-1974, the Iranian revolution of 1978-1979, the Iran-Iraq War initiated in 1980, the first Persian Gulf War in 1990-91, and the oil price spike of 2007-2008.
How long does a recession last?
The 1873 recession lasted 65 months and the Great Depression lasted 43 months.
However, since World War II, recessions have lasted an average of 11.1 months. The longest post-WWII recession was the Great Recession, which lasted 18 months.
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What happens after a recession?
An economy comes out of a recession, the economy expands, businesses grow, the stock market rebounds, there is more investment in business, more hiring, steadying of consumer prices, lowering of interest rates, and more tax revenue for government spending on programs and infrastructure.
This means that you can expect more jobs, more raises and bonuses when you do have a job, an increase in your stock portfolio, the value of your home will go up and real estate prices will increase. Governments will have more money to invest in roads, schools, utilities, public programs — and those will create jobs and improve the quality of life.
Bottom line: Be ready to deal with what happens in a recession
Whether we are living in a recession already, or are headed for one soon or in a long time, there are some solid changes you can make today to deal with a recession:
- Shore up cash
- Live within your means
- Grow your earning potential by way of a raise, side gig, start a business, or investing in a new, work-at-home career — or a job (even one that does not require a degree). We also put together a list of recession-proof business ideas and recession-proof jobs.
- Sell things you own for cash now (before prices drop in a recession)
- Pay off / down debt
- Consider selling a home you can barely afford or are otherwise thinking of selling now
Here are some resources if times are tough:
Here is what happens during a recession: prices increase, individuals and businesses spend less, hiring slows, and the stock market declines.
A recession is a confluence of the above six forces, tipping each other off like a domino chain. Recessions typically happen about every 10 years, leading some economists to predict recessions as a normal part of the economic cycle.
Since World War II, recessions have lasted an average of 11.1 months. The longest post-WWII recession was the Great Recession, which lasted 18 months.
An economy comes out of a recession, the economy expands, businesses grow, the stock market rebounds, there is more investment in business, more hiring, steadying of consumer prices, lowering of interest rates, and more tax revenue for government spending on programs and infrastructure.
