You may or may not have heard that we are currently in a recession. Knowing that might make you wonder what exactly is a recession? A recession is a notable decline in an overall economic affair for two consecutive quarters. Unfortunately, recessions are an inevitable aspect of the business cycle and economic flow in the U.S. There are a few factors that are caused by a recession such as a negative gross domestic product, lower retail sales, and cut prices of income and manufacturing throughout a certain period just to name a few.
When there is an official economic recession, several factors are a part of the cause. To start, any sudden economic surprises such as the oil supply being cut off or for an even more recent example, a virus outbreak can lead to a recession. Overwhelming debt causes people and or businesses to file for bankruptcy which when done in excessive amounts will lead to a recession. Large amounts of inflation and deflation both can cause a drastic change in individuals’ and businesses’ spendable money. Whenever there is a drastic change, especially when dealing with money on a large scale it oftentimes can and will lead to a recession.
You might think that a recession is like depression. While in fact, they are similar with only a few differences. The main differences between a depression and a recession are the time frames and the extent of decrease the economy is going through. Recessions typically range from a few months to a few years while depression may last a few years to even decades later. In a depression, the GDP falls much more, and the unemployment rates are much higher compared to that of a recession.
Predicting a recession can be difficult but there are a few things to look at that might indicate one is soon to come. The yield curve is a good place to look when trying to predict a recession. It is a graph that shows the market value of different government bonds. In a properly functioning economy, the yield is higher on long-term bonds. The opposite is an inverted yield curve which shows long-term yields lower than short-term yields which is often a sign of a recession. Consumers spending less than months or years prior is another sign of a recession approaching. An unexpected decline in the stock market may also lead to a recession. Increasing unemployment levels are another factor that will lead to an upcoming recession. Of course, there is nothing that will predict a recession every time, but these are a few indicators that have happened before a recession.
No matter how prepared you are for a recession, it can and most likely will be a difficult time. You should prepare for the worst and hope for the best. Recessions are a part of the business cycle and economic flow. It is important to not make irrational decisions and push through because there is always light at the end of the tunnel. If there is something positive to take from this, it’s that history often repeats itself and there will most likely be a strong time of economic growth to come after the recession.
Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.