What Is a Recession? Preparing For the Next Economic Downturn

Know the signs of a recession so you can be ready.
What Is a Recession? Preparing For the Next Economic Downturn
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Anyone who lived through the Great Recession of 2008 — or any of the numerous American recessions that came before it — might be familiar with buzzwords like “yield curves” or “bubbles” bursting. So when news broke of an inverted yield curve in mid-August, rumors began to fly about the next impending recession. Even President Donald Trump chimed in on the situation:

So what do the “numbers & facts” say? It’s probably too soon to go full-on Doomsday Preppers, but there are some things you should know about a recession in order to prepare for the next one.

This guide to recessions will cover the following:

Keep reading to learn more about recessions, what they mean for your wallet and how to prepare for one.

What Is a Recession?

Simply put, a recession is a period of decline in a country’s economic activity. The National Bureau of Economic Research narrows it down a bit:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”

The NBER is a nonprofit, non-partisan organization that conducts economic research and determines the fluctuations in economic cycles. It measures the periods between peaks — aka highs — and troughs — aka lows — in economic activity, which are recessions. The periods between troughs and peaks are known as expansions.

History of US Economy Recessions

Although younger generations may see recessions as a rare occurrence, older generations who have lived through many know better. In fact, there have been a few decades that experienced more than one recession period — the 1950s, 1960s and even the ’80s, which are known as a time of excess and opulence.

The term “recession” has a negative connotation, but by textbook definition, it’s simply a decline in economic activity. Think of it like hibernation: The economy will slow down, but there are economic cycles, so it’s just a matter of waiting for the economy to wake up again. Many times during a recession, the real gross domestic product doesn’t decline significantly; in more lengthy recessions, the GDP can suffer.

For example, during the Great Recession of the late 2000s, the GDP fell 4.3% from its peak in 2007 to its trough in 2009, according to the Federal Reserve. But during the 2001 recession which was caused by the bursting of the dot-com bubble, the GDP fell only 1.1% during Q3 of 2001, the final quarter of that recession. 

The real GDP isn’t the only thing affected during a recession, though. During the Great Depression, for example, unemployment skyrocketed to nearly 25%, and industrial production fell 36%. Even marriages failed at a higher rate.

Of course, the Great Depression is an extreme example. It’s known as the “longest and deepest downturn in the history of the United States,” according to the Fed.

Related: The Next Housing Bubble Could Be in These States

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How Long Do Recessions Last?

Since 1854, there have been a total of 33 recession cycles that last an average of 17.5 months, according to the NBER. When you only consider the period from 1945 to present, the average drops to 11.1 months, which could signal that recession periods are shrinking. The last expansion began in June 2009, which means that the U.S. economy has been growing for over a decade now.

Longest American Recessions: The Great Depression Onward
Recession PeriodStartEndTime Elapsed Total
The Great Depression — Late ’20s and Early ’30sAugust 1929March 19333 years, 7 months
The Great Recession — aka 2008 Financial CrisisDecember 2007June 20091 year, 6 months
The Early ’80s RecessionJuly 1981November 19821 year, 4 months
The Mid-’70s RecessionNovember 1973March 19751 year, 4 months
The Great Depression — Late ’30sMay 1937June 19381 year, 1 month
The Late ’60s RecessionDecember 1969November 197011 months
The Late ’40s RecessionNovember 1948October 194911 months
The Early ’60s RecessionApril 1960February 196110 months
The Mid-’50s RecessionJuly 1953May 195410 months

You might be surprised to see the Great Depression on this list twice. Although the Depression lasted about a decade, the economy was only in a recession for about four and a half years of that period. Still, the economic effects were devastating.

Find Out: Has Your State Recovered From the Great Recession?

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Key Predictors, Indicators and Warning Signs of a Recession

When you search for the top indicators of a recession, you’re likely to get a myriad of different answers. Above all, though, you’ll probably hear about the inverted yield curve.

What Is a Yield Curve?

If the Pumpkin Spice Latte is the harbinger of autumn, the inverted yield curve is the harbinger of another recession. At least, that’s what some speculative economists will have you think.

In mid-August, interest rates flipped on short- and long-term U.S. Treasury bonds, creating what is known as the inverted yield curve. To boil it down simply: Some investors are losing faith in the long-term health of the economy, and, as a result, there is a higher demand for short-term bonds.

The following graph shows two inversions of the yield curve in 2001 and 2007 — both of which preceded recessions:

The last inverted yield curve was in 2007, just before the Great Recession, Barron’s reported. And yield curves have a hauntingly accurate way of predicting the recessions following the Great Depression. The time between the inverted yield curve and the recession always varies, however, so it’s hard to pin down exactly how the yield curve forecasts a recession.

Other Indicators of a Recession

Besides the inverted yield curve, there are other signs of a recession. John Hilsenrath, a Wall Street Journal senior correspondent, took the time to explain some potential recession indicators on the publication’s podcast, The Journal:

  • Excessive spending: For the Great Recession, this would be the housing bubble; in the early 2000s — the tech bubble.
  • Shocks to the system: In 2008, this was the collapse of Lehman Brothers, and in the early ’90s, it was the oil price spike.
  • The Fed’s interest rates: To try to curb inflation, sometimes the Fed will raise interest rates. Hilsenrath said the Fed sometimes goes “too far.”

Other indicators could be a stock market crash — on Aug. 13, the Dow plunged 800 points and the S&P 500 fell 3%. Some people fear a recession when things have simply been “too good” for a long time. But Hilsenrath alleges that other economies have been in an upturn for much longer than a decade. For example, China’s economy has been in an expansion period for 30 years.

He does point out one potential wild card for a recession this time around: The U.S. trade war with China.

“I think this economy has the potential to go for a really long time, but this might be a case where we shoot ourselves in the foot, and I think the biggest risk is a trade war that filters its way through our financial system, through our currency, into our economy and leads to bad outcomes for everybody in the end,” Hilsenrath said.

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Recession vs. Depression

There is no true economic marker that differentiates a recession from a depression. A depression is just a general term for a very bad recession. Here’s a look at the Great Depression and the Great Recession by the numbers:

Statistically Speaking: Great Depression vs. Great Recession
Economic MarkerThe Great DepressionThe Great Recession
Loss in real GDP~30%4.3%
Peak unemployment25%9.5%
Duration10+ years1 year, 6 months
Value of goods produced27%4%

Read: The Best and Worst Decades for America’s Money

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What Does a Recession Mean For You?

People of different economic backgrounds will experience the pains of a recession in different ways. Some general things will happen: Unemployment will rise, the GDP will shrink and the stock market will suffer. But a recession could carry worse consequences for an unemployed single mother of two than it might for a young professional with no dependents and a steady job.

No matter what your situation is, there are a few things you should know to prepare for the next slowdown in economic growth.

How Can You Mitigate Potential Loss?

Recessions can be scary, but it’s important to keep your cool. In an interview with CNBC that took place shortly after the mid-August inverted yield curve, investment firm president Mitch Goldberg said not to make rash decisions.

The things on the to-don’t list would be don’t panic, don’t make hasty financial and investment decisions,” Goldberg said.

If you are really, really concerned about a recession, and you feel that your short-term investments might not survive a bear market, you could move some of your investments to long-term CDs, high-yield savings accounts or even just hold on to the cash. But if you have a diverse long-term investment portfolio, it should be built to weather both bull and bear markets.

What Does a Recession Mean for Your Employment?

During a recession, unemployment rises. That means that some of the workforce will be affected by the next recession. There’s no easy way to determine if you will lose your job during a recession. It’s helpful to look at:

  • The financial state of your company
  • Your company’s investment in you as an employee
  • Your job stability — can you be replaced?

Take a long, hard look at your current employment. Depending on your situation, it might not be a bad idea to spruce up your resume, just in case. And it’s always best practice to do whatever you can to make yourself indispensable and diversify your skill set. It’s a win-win for you and your employer when you’re performing at your best, no matter what the economy is like.

Of course, job loss during a recession could be completely out of your control; in that case, take the time when the economy is in an expansion period to build your financial safety net.

What Does It Mean for Your Investments and Retirement Funds?

Learn from a big mistake some investors made during the Great Recession: They sold their stocks when they were plummeting. Your long-term investment strategy should already have recessions and bear markets built into it, anyway. If you hold on to your investments long enough, they will eventually recover and be worth more in the long run.

The same goes with your retirement accounts; you should expect to experience a recession during your career. In the past 165 years, there have been more than 30 recessions. Statistically speaking, you’ll probably experience more than one while you grow your retirement nest egg.

Keep Reading: If a Recession Hits, Should You Invest or Hold Off?

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Are There Any Benefits to a Recession?

It’s tough to find much of a silver lining when the cloud of recession is looming. But for those seeking optimism, there is good news: Slower inflation.

Although the goal of the Federal Reserve is to simultaneously cool the brakes on inflation while avoiding a recession, sometimes the latter could help slow down the former. While a recession won’t necessarily cure inflation, it can help slow it down.

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How Can You Prepare for a Recession?

There’s nothing you can do to avoid a recession, but it’s smart to get your money in order while the economy is doing well. Consider these tips to help you weather the next recession:

  • Pay down debt. Household debt is much lower now than it was before the Great Recession in 2008, according to Mark Zandi, chief economist at Moody’s Analytics. In a January 2019 interview with NPR’s Planet Money podcast, he said that many Americans are in better shape than they were before the last recession — of course, that’s not the case for everyone.
  • Grow your emergency savings fund. Unemployment hit nearly 10% during the Great Recession, and it’s important to prepare for the worst. A good rule of thumb is to have six months worth of salary saved up in case disaster strikes. That’s not a feasible statistic for everyone, but the more you save now, the better off you will be in the long run.
  • Take the time to analyze your finances. A plethora of personal finance apps exist that help with budgeting, such as Mint and You Need a Budget. Or, check out these free budget templates compiled by GOBankingRates. Oftentimes, it helps to track your spending thoroughly to see where you should cut spending.

The most important thing to keep in mind is that the economy goes through phases of expansion and recession. Being diligent during the good times — and the bad — can help you be financially successful in the long term.

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More on Money and the Economy

Erika Giovanetti is a writer who has covered a multitude of subjects, from personal finance to politics to the great outdoors. 

About the Author

Erika Giovanetti is a Charlotte, NC-based writer and editor who enjoys spending time in nature, reading modern fiction and non-fiction, unearthing and recreating family recipes, playing with her kittens and spending time with friends and family.