For about a year now, the media headlines have been flooded by the potential of a recession. In this article we will go through the common indicators of past recessions and ways to prepare if that does come to fruition. While a recession in the economy is never guaranteed, regardless of what the talking heads will say, it is important to be prepared for either scenario.
Common Signals of a Recession & Our Current Status
A recession is a significant decline in economic activity that typically lasts for several months or even years. The signs of a recession can be difficult to spot, as they often develop slowly and can be influenced by a range of economic, political, and social factors. However, there are some common signals that suggest a recession may be on the horizon.
- Declining GDP: One of the most reliable indicators of a recession is a decline in Gross Domestic Product (GDP), which measures the total value of goods and services produced in a country. When GDP declines for two or more consecutive quarters, it is often a sign of a recession.
The chart above shows quarter over quarter GDP growth in the United States since 2019. The big dip and subsequent bounce back was due to the COVID-19 response of shutting down the economy and then reopening. From there, we have seen some softening within the GDP growth with Q4 showing a slight decline. This chart will grow in importance of where things head next.
- Rising unemployment: As economic activity slows down, businesses may start to lay off workers, leading to higher unemployment rates. A sustained increase in unemployment over several months can indicate that a recession is underway.
The chart above show the last 5 years of the US unemployment rate. The spike above is due to COVID-19 lockdowns in 2020. Ever since then, this has been the most resilient statistic in avoiding a recession. While we have seen layoffs begin in 2023, especially in the tech sector, the rate is still at a very low level of 3.6%.
- Declining consumer spending: Consumer spending accounts for a significant portion of economic activity in many countries. When consumers start to cut back on spending, it can have a ripple effect throughout the economy, leading to lower business profits, higher unemployment, and slower economic growth.
The consumer represents roughly 70% of the US economy. The data shows that this has continued to stay at a high level, likely due to all the stimulus from the pandemic.
How to Prepare for a Recession
- Have an emergency fund: Having an emergency fund can help you cover unexpected expenses during a recession. Aim to have at least 3 to 6 months of living expenses saved in an easily accessible account such as a savings account.
- Control your expenses: During a recession, it’s important to control your expenses as much as possible. Look for ways to reduce your monthly bills, such as by negotiating with your service providers or cutting back on unnecessary subscriptions.
- Be cautious with debt: During a recession, it’s important to be cautious with taking on new debt. If possible, try to pay off any high-interest debt before the recession hits.
- Keep growing your skills: During a recession, the job market can be tough. Consider taking classes or learning new skills to make yourself more marketable.
- Keep perspective: Recessions are often temporary, and the market will recover eventually. It’s important to keep your long-term investment strategy in mind and avoid making impulsive decisions based on short-term market fluctuations.
It’s important to remember that these are general tips, and each individual’s financial situation is unique. For more specific recommendations to your personal situation, please feel free to contact an advisor on our team.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
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