The definition of economic doom: Recession.
It’s every homeowner, parent, investor, business owner, and employee’s greatest fear. Especially when you look at the lasting effects previous recessions have had on the economy.
Recently, there’s been much speculation about whether or not another recession will be creeping into the economy soon, and how this one will pan out. And with speculation comes rising anxiety around the topic. Mass layouts. Sky-high inflation. Lower profit margins. It’s understandable why people might fear another recession.
But is a recession really as bad as it seems?
To answer this question, I’ve put together some of the recession myths and misconceptions still floating around today and debunked them for you. Take a look:
- What makes a recession, a recession?
- Myths and misconceptions about a recession
- Staying one step ahead of any recession
What makes a recession, a recession?
It’s broadly understood that there’s a recession when the economy experiences declining gross domestic product (GDP) for at least two consecutive quarters. GPD is the monetary value of final goods and services produced each year within a country.
But it’s up to the National Bureau of Economic Research (NBER) to declare a recession.
Rather than using declining GDP, NBER declares a recession when there’s a significant decline in activity across all aspects of the economy and this decline lasts for more than a few months.
Other indicators need to be looked at when deciding if a recession will come in the near future. These include:
- Retail sales
- Durable goods orders
- Consumer Confidence and Consumer Sentiment
- Unemployment rates
- Non-farm payrolls
- Producer Price Index (PPI)
- Consumer Price Index (CPI)
You can assume that there’ll be a recession if these indicators fall into negative numbers and remains there for two consecutive quarters.
What causes a recession?
Many reasons are to blame for a recession occurring. However, sudden economic shocks or imbalances (such as high personal debt/loaning and high consumption/low spending) are the prime culprits for a recession taking place.
You can think of the Great Recession of 2007-2009 as an event that followed the bloated housing debt market crash. Or the COVID-19 recession, which happened after huge spending declines from economic shutdowns and job loss.
On a practical basis, recessions happen when a series of events or a single event creates a fall in economic growth. Smaller business profit margins, decreased consumer spending, and rising unemployment all accompany the declined economic growth.
Typically, these factors create a vicious cycle. Employees lose their jobs, so they don’t spend money, which then causes companies to see a fall in profits. Companies then need to cut their losses to make up for these lower profits by laying off employees.
How long does a recession last?
No recession is ever the same. Some can last for a few weeks and others several years. The length of each recession depends on its cause, market conditions, and the government’s response.
According to NBER, the average recession from 1854 to 2022 lasted 17 months. However, the average recession lasted only 10 months when you use data from recessions between WWII to today. But this is only an average and not a rule. This difference of seven months can be linked to the more informative approach goverment had in dealing with economic recessions between WWII and today.
The Great Recession stuck around for 18 months between 2007 and 2009. You’ve also got the early 1980s recession that lasted 16 months. But then there’s the 2020 COVID-19 recession, which was the shortest ever recorded only lasting for two months.
You might be wondering, “Well how can the shortest recession have only lasted two months when you just said it takes two consecutive quarters or six months of decline for there to be a recession?”
For the most part, six months is a rule when NBER identifies recessions. But the COVID-19 recession was one exception to this. Even though the spring of 2020 saw a dip in the economy for just two months, it was wide-reaching and severe enough for NBER to declare a recession.
What factors play a role in a recession’s length?
As I said above, a recession’s length depends on its underlying cause, the government’s initial response, and market conditions.
If you look at the Great Recession, its catalyst was an overblown housing bubble. Millions of people were underwater with their property investments or were foreclosed upon. A gap of almost $1 trillion was created from GDP plunging over 4%.
At the same time, you saw major banking institutions shut down because they were overrun by subprime loans. The bankruptcy of Lehman Brothers is one example of that. The economic impacts of the Great Recession carried on for years even though it only lasted for 18 months.
On the other end of the spectrum, the COVID-19 recession began when governments decided to stop entire divisions of economies to prevent the pandemic from spreading. Many of these divisions were able to bounce back once the world reopened because these segments were strongly positioned before the pandemic’s outbreak.
The US, along with other countries, had economic stimulus policies in place that helped the economy get into a more stable state. The job market has mostly recovered, but we’re still seeing impacts from the COVID-19 recession.
Both rising corporate profits and supply chain snarls have caused inflation rates to skyrocket. The Federal Reserve has responded to this by steadily hiking interest rates throughout 2022 to try to calm down demand and prices.
What about a recession in 2023?
No recession is the same, and it’s difficult to predict exactly how a recession will span out or how it will affect the economy. Most economists do predict a mild recession taking place sometime within 2023.
For the US, these economists believe that the recession will start in mid-2023. It’s said to last anywhere from a few months to over a year. But we can only know how this recession will react with the different economic divisions once it happens – if it even happens at all.
Myths and misconceptions about a recession
A recession has the power to frighten an entire community, country, or planet. The misconceptions and myths surrounding recessions only add fuel to the fire. Here are some debunked recession myths:
Myth #1: Recessions happen all the time
It’s natural for local stock prices to drop at times. You might see these prices continuously drop for a few days. That doesn’t mean there’s trouble on the rise. Prices (and other elements of the economy) dropping and rising is an ordinary flow pattern.
In the last 70 years, the US government has only been in an official recession for 15%. So, it isn’t as common as many people think. As I said at the beginning of this article, a recession is only present when there’s been a consistent decline in various economic indicators for at least two consecutive quarters (or six months).
Myth #2: You shouldn’t invest money during a recession
Putting it lightly, the economy takes a massive dive when there’s a recession. For ordinary people, job security is threatened, and households tend to hold on tight to the money they’ve saved just in case they lose their job or part of their income. People don’t spend money during this time. But that doesn’t mean you shouldn’t or that it isn’t savvy to do so.
Recessions offer unique investment opportunities. One popular investment type during a recession is real estate. Economic downturns tend to lower property prices. You might find that you can purchase an apartment or house that previously you couldn’t.
Of course, this isn’t for all people, especially those living paycheck-to-paycheck. But if your savings give you the ability to make this investment, it would be wise to do so.
Recessions are bound to end, and when they do, the economy typically roars back to life and sees great economic highs. That means property prices will increase, and your investment opportunity will be lost. And if you do make this investment during the recession, you could make a good amount of profit if you sell the property.
Myth #3: Recessions are only caused by uncontrollable events
The shortest recorded recession was caused by the COVID-19 pandemic, which was an uncontrollable event. But that doesn’t mean all recessions are created from unpredictable circumstances.
From 2007 to 2009, the world was plagued by the Great Recession. No large-scale natural disaster or pandemic caused the Great Recession. Instead, it was encouraged through a lack of government regulation in US property and financial markets.
This lack of government oversight resulted in risky investments being made by financial institutions. Risky investment practices led to consumers being allowed to borrow too much money. All these events culminated together to collapse the US economy, which then extended to global economies. This means the Great Recession could have been avoided.
Mild recessions are typically accepted as part of the economic journey, despite the pain they bring with them. But that doesn’t mean recessions can’t (for the most part) be prevented by effective financial management from governmental bodies.
Myths #4: There isn’t any way to prepare for a recession
History has shown that all economies need to go through recessions before they’re reset and can grow even more.
One of the first steps to effective recession preparation is basic: Strengthen your understanding of recessions. If you can, save up for any unforeseeable challenges you might face – whether it be a recession or other economic challenges.
From there, you also want to pay closer attention to economic indicators.
Sometimes, NBER is slow to provide an official statement, as recessions can only become visible after some time of economic struggle. Being able to predict economic trouble soon will help you get ahead of the chaos before a recession occurs.
To get ahead of the chaos, you want to examine your spending habits. If you’re well-prepared, you can use this time to make your finances more stable either in your business or personal life.
On a personal level, that may be cutting down on expenses that you don’t exactly need to better your household’s bottom line. For your business, that might mean finding ways to increase the efficiency of your recurring work patterns and bettering the way you run business processes.
Staying one step ahead of any recession
Recessions bring a ton of economic pain with them for both your personal and business lives. But they can also be a time that brings financial rewards.
You’re provided with a ton of unique and profitable investment opportunities during a recession that can become very advantageous once economic indicators start to rise again.
Recessions aren’t forever, and once they’re over, the economy, historically, bounces back stronger. If you’re well-prepared, you can use this time to work on making your lives more prosperous.
Do you think we’ll experience a recession in 2023? Let us know in the comments.
This is such an exhaustive post! I love it.
Very Well Explained , Applause to the Writer!