Between war, out-of-control inflation, and an income gap big enough to get a ship stuck in it, it seems pretty clear that the US is not doing great when it comes to money.
Still, talking heads on the television and professional opinion havers online are reluctant to use the scary R-word: recession. They seem to fear that saying the word out loud will cause panic and make things worse.
We wanted to dive in and find out if they are intentionally being obtuse or if there really isn’t anything to worry about.
To start out, let’s look at what a recession actually is.
What Is a Recession
Let’s start with the NBER, or National Bureau of Economic Research. They are basically the organization that is in charge of studying the economy, and what they say usually goes. Lots of large institutions and policymakers consult with them to shape the world around us.
They define a recession as a decline in the economy that lasts a while. That is a frustratingly vague definition, so let’s break it down.
A Significant Decline in Economic Activity
The economy is made up of a lot of different parts. One of the biggest indicators of economic health is called the Gross Domestic Product, or GDP. Long story short, a country’s GDP is how much value they produce. It’s really complicated, and we don’t have time to get into its nuance here.
In ye olden days, a recession was defined by the GDP. Two quarters of declining GDP meant the US was in a recession.
Nowadays, they use a lot of different indicators in addition to GDP, including employment, income, industrial production, and how much stuff is being sold in stores. It’s unnecessary for every indicator to decline for a recession to occur, but that is usually the case since they are all so interconnected.
So just how long does the economic decline need to last before it’s a recession?
More Than A Few Months?
The answer varies depending on your source. Generally, the answer is “more than a few months.” What does that mean? Basically, the NBER looks at the economy constantly, and they are the ones who label a period as a recession. After two months or so, they will evaluate the trend, and decide whether it’s been long enough to call it.
We are definitely in a period of decline, and it has been at least two months since things started going to hell. That should mean we are in a recession, right?
Are We In a Recession?
The stock market is definitely going a bit crazy, but other indicators are actually rising. Employment, for instance, is actually on the rise.
That doesn’t necessarily mean things are going great. The term recession is a macroeconomics term, and it’s a fairly specific thing. It doesn’t, for instance, say anything about job quality or account for the mass resignation.
It’s simply that, at this time, the US is not in a recession right now.
Are we headed into one? We might be. The thing to look out for is called an inverted yield curve.
Inverted Yield Curve
Every time in the history of US economics that there has been a major recession it was preceded by an inverted yield curve. That means if we see one, it’s time to worry.
An inverted yield curve means that short-term bonds are paying better than long-term bonds. It’s a difficult concept to simplify, but if we are just going to scratch the surface, just know it’s bad. It means that traditionally very safe investments, like a ten-year loan, are worth less than traditionally risky investments, like a two-year loan. That means investors have very little incentive to give out those big long-term loans.
If the curve inverts, you will probably hear about it from every financial guru and publication that exists. In the past, an inverted curve has meant that a recession is coming in the next few months.
How To Survive a Recession
The best way to become recession-proof is to be stable enough to wait it out. That way, you aren’t hurt by the downturn, and you are ready to jump on opportunities that will appear during the growth period after a recession.
Generally, you’ll want to make sure to do these six things to attain that stability.
Car loans, mortgages, and especially the dreaded credit card debt can ruin you if you lose your job or your investments during a recession. Working to pay down debt can help keep you on track so that you aren’t panicking during a downturn.
Cut Back Extra Spending
To get money saved to pay down debt and create a savings account for emergencies, the best thing to do is start ruthlessly cutting out extra expenses. For example, do you really need that 30th video game you aren’t going to play?
Think Long Term
The stock market will recover, even if it seems bad now. So don’t stop investing just because things have drooped.
Invest In Yourself
During a recession, it’s easy to lose sight of the light at the end. However, the recession will end, and if you use the time during the downturn to make yourself more valuable, you’ll be ready to take advantage of the economic growth when the recession ends.
That’s about it for today. You’ll notice that a lot of the tips are similar to surviving inflation; you can read more about that here. You should also consider starting a gig to gain passive income since you can be building during the recession and then grow fast after.