Invest Financial Planning

What Is a Recession and How Will It Affect Your Finances?

Dori Zinn  |  March 16, 2020

Whether or not we are in a recession right now doesn’t really matter. We will be… eventually. Here’s what to expect if this is your first one.

Right now there’s a swath of the population (those under age 30) that is experiencing economic turmoil for the first time in their adult lives. And even if this isn’t your first rodeo, coming off more than a decade of economic growth can lull anyone into a false sense of security.

With the “R” word — recession — making the rounds, what’s important to remember is that recessions are a natural part of how economies operate.

Recession defined

A recession is a decline in economic performance that goes on for many months — technically two or more consecutive quarters where there’s negative growth in Gross Domestic Product (GDP). The National Bureau of Economic Research (NBER) is the group that officially declares a recession.

The last one — the Great Recession — lasted from 2007 to 2009 and is deemed the longest recession in the United States. It was the country’s worst financial crisis since The Great Depression in 1929. 

Not all recessions play out the exact same way. And right now we have the added complexity of dealing with the Coronavirus. If this is the first time you’ve experienced this economic cycle, here’s what you can expect to happen in the coming months. 

What’s happening right now

Economies go through four phases as part of the economic cycle — the expansion, peak, contraction and then the trough. The length of time it takes to experience these cycles vary, but historically we’ve seen this phenomenon play out the same way over and over again.

Expansion is the phase that marks a growing economy — GDP is healthy, unemployment is low (in the 3% to 4.5% range), inflation is normal — around 2% — and the stock market posts regular gains. Eventually the markets and all other economic indicators hit a peak. And it’s all downhill from there. 

When exuberance over the economy’s good health overheats — when everyone expects the good times to go on forever — reality sets in and we experience a contraction. This phase which we’re in right now happens quickly, driving down GDP, stock market returns (as investors start selling) and causing the unemployment rate to eventually rise as companies are forced to lay off employees. 

When GDP growth has turned negative two quarters in a row, that’s when economists say we’re in a recession. Next, we enter the final stage of the cycle, the trough, which marks the worst that the economy can get. Eventually the roller coaster starts ticking up once again to kick off the next phase of expansion.

Investments will be volatile

The last recession came in the wake of a subprime mortgage crisis. The one before that came from the dot-com bust followed by 9/11. Both of these brought down the stock market for a period of time. Right now it’s the Coronavirus causing the markets to be exceptionally volatile. 

What’s good to remember is that investing in the stock market is made for the long haul. The best thing you can do is weather the storm. Expect that the market will drastically fluctuate and leave your money where it is. If you’re closer to retirement and need your money sooner, you could put it away in a high-yield savings account. But even those are experiencing drops in APYs. 

While you won’t lose money in a high-yield savings account, you won’t gain as much as you would investing in the stock market after the recession ends.

Unemployment will go up

Concerts, sporting events, conferences and other gatherings are getting cancelled or postponed. Restaurants, daycares and schools are temporarily closing or experiencing a drop in clientele. Many businesses don’t have the capacity to pay rent or even basic operational costs without money coming in. This means they’ll have to start making staff cuts, even if it’s only to stop the financial bleeding for the time being.

While unemployment has never been higher than it was during the Great Depression — almost 25% — recessions cause a spike in people losing jobs. In a healthy economy unemployment is around 3.5% to 4.5%. Right now it’s at 3.5%. In 2009, near the end of the last recession, it went as high as 9.9%.

Some people in your community will lose their jobs — permanently or temporarily — without access to severance pay, paid time off, or other benefits to make sure they don’t fall behind on bills. 

Keep in mind that side-hustle work will likely also see a dramatic shift. As fewer people travel, Uber and Lyft drivers will see less demand. On the flip side, services like Shipt, Instacart or Postmates for food or groceries may experience an uptick.

Access to healthcare may get spotty

This is less an effect of a recession than it is of the Coronavirus pandemic. Hospitals and clinics are getting ready to handle a higher volume of patients. If you have an elective procedure on the calendar, you may be asked to postpone. And if some other healthcare issue arises, you might not be able to get into a doctor’s office for days, weeks, or even months at a time, depending on where you live. Also keep in mind that some doctors might not be taking on new patients. The best thing you can do right now is to follow guidelines — hand washing, social distancing — designed to keep you and your family healthy.

Reduced goods, services, and travel

Already we’re seeing supply and demand affected. Consumers drive the U.S. economy and our confidence about spending is waning. In some cases we simply can’t buy the goods and services we need. For example, the current European travel ban has many families re-evaluating vacation plans. With restaurants closing or limiting staff — and people stocking up on goods to cook at home — you can expect to see a drop available food options as well. And when it’s safe to gather in groups again, some of your favorite family restaurants may not be around anymore.

Education (and productivity) will drop

Once again, due to Coronavirus, as schools close, parents are faced with limited childcare options. This means that even if they were able to adjust their schedules to work from home (or are forced to do so), they do so without help. This also means that their children are behind on their schooling due to the lapse in attendance.

Some teachers, schools, and districts are working on ways to offer students online resources while schools are closed. But that still means parents might still be required to limit their workload as they care for their children. And there are other risks for students: Many rely on school breakfast and lunch as their only meals of the day. If schools are closed, some students could end up going hungry.

When will things go back to normal?

The things we’re experiencing due to the Coronavirus are evolving daily. As far as the economy and the stock market goes, no one can accurately predict when we’ll be at the bottom of the trough. We can get some perspective by looking at how long past recessions lasted:

How Long Do Recessions Last?

Knowing that recessions are a normal part of how business and the economy works doesn’t make it easier to stomach the daily ups and downs. Just remember: Recoveries are also a normal part of economic cycles, too. 

For more on how to get through these rough waters, see the related articles below. 

With additional reporting by Dayana Yochim

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