What Is a Recession and How Might It Affect You?

What we’ll cover:

• A recession is a period of significant slowdown in national economic activity over the course of several months
• People may experience job loss or reduced income during a recession, which can affect the ability to pay bills and reach financial goals
• The timing and duration of a recession are out of our control, but there are steps we could take to financially prepare ourselves for one

You may have seen recession defined as “two consecutive quarters of decline in real GDP.” 

But what does it really mean when we say the economy is in recession? And who gets to make that call?

In simple terms: A recession is a time of significant slowdown in economic activity throughout the country over the course of several months. This is when you tend to see a jump in unemployment, stock market losses, and distress across different industries. And in response to the economic downturn, both consumers and businesses will typically try to cut spending and costs. 

Recessions are generally hard to predict. A lot of times we may not even know we’re in one until you start to see its impact: declines in personal income, employment numbers, industrial production and wholesale-retail sales volume. 

While many may try to forecast recessions using these economic indicators, it’s the official job of the National Bureau of Economic Research’s Business Cycle Dating Committee (NBER) to determine the start and end dates of US recessions.

How long does a recession last?

Recessions can be nerve-racking, but they don’t last forever and are an expected part of the business cycle.

Still, it’s often hard to tell how long a recession will last since no two are exactly the same – the cause, scope and duration can vary.

For example, they may be relatively short: The 1980 recession lasted six months. Or they could be more prolonged: The 2008 financial crisis lasted 18 months. 

But regardless of how long it may last, a recession can affect us all in some way. 

How might a recession affect your job?

Companies typically try to cut costs when business slows down. As a result, people could see smaller paychecks because of reduced work hours. Some may even lose their jobs if companies decide to further cut down their payroll. 

This is why economists pay close attention to the unemployment rate when trying to determine whether we’re in a recession. Growing unemployment is often a sign of economic trouble and can signal further challenges ahead. 

How might a recession affect your ability to pay bills?

As people bring home less money or lose their income, bills such as credit card payments and mortgages may start to pile up, causing financial stress. Some may lose their homes, cars or other assets when they can’t pay on time. And others may have to take on more debt to pay for essentials. 

In the face of these financial pressures, people are likely shopping and eating out less to save money. The drop in consumer spending can hurt businesses large or small, which could lead them to cut even more hours or jobs. In this way, recession can create a vicious cycle that can make hard times worse.   

How might a recession affect your ability to save for retirement?

Saving for retirement takes patience and discipline even during the best of times. But this can become a real challenge during a recession. 

After all, if you’ve lost your job, retirement savings is probably the last thing on your mind as you focus on covering essential living expenses. 

People who still have jobs may question the benefit of contributing in a time of market volatility and stock losses. They may even be tempted to stop their contributions altogether until the economy recovers. This is how tough economic times can sometimes knock people off course when it comes to their financial goals.

Before making any decisions to pause your contributions, take a moment and evaluate your financial situation. If you can afford to, keep contributing what you can – every little bit adds up over time.  

What economists are saying about the chances of a recession in 2022

With inflation at an all-time high and aggressive interest rate hikes from the Federal Reserve, many are worried about a recession. 

So what are the chances of us hitting a downturn?

Goldman Sachs economists believe there’s a 48% cumulative probability of a recession over the next two years based on their June 2022 analysis. But they expect any potential recession to be a shallow one rather than a deep downturn. 

What you could do to prepare for a potential recession

Shallow or deep, recessions can paint a tough economic picture. But there are steps you could take to help maintain a sense of control and confidence over your finances in times of uncertainty: 

1. Boost your emergency fund.
2. Prioritize spending needs in your budget.
3. Stay on top of debt to maintain a good credit score; look for ways to consolidate at a lower interest rate.
4. Stay focused on the long term when it comes to saving for retirement – don’t try to time the market.
5. Consider opportunities for additional income like taking on a side gig or asking for a raise at work.