Currently, a potential recession is on everyone’s minds.
Some fear the worst, while others look forward to a drop in prices and values.
Often, we look to professionals for reliable and accurate information regarding finances and the economy.
Economists collect information about the economy, analyze trends, and predict recessions.
Find out more about how they do so and what a recession could mean for society and the individuals below.
Economists are experts in the economy and economic policy.
They collect and study information about recessions, depressions, and thriving economies.
This data can display common elements or events leading up to recessions or indicate specific trends or cycles that most economies follow.
Accordingly, they can develop theories or formulas to help determine a future recession.
While they may not be able to determine an exact date of a recession, they can point out favorable conditions for a future recession.
They can also estimate the length by looking at the current economy and the variables at play.
A recession occurs when the economy experiences a significant decline in Gross Domestic Product (GDP) and employment rates.
GDP showcases low industrial activity, trade, and consumer spending.
If this decline lasts longer than a couple of months and the economy struggles to recover or regain traction, this signals a recession.
There are a few types of recession, identified by their length, severity, and effects.
The most common recessions are:
- Boom and Bust Recession: In this type of recession, there will be a ‘boom’ or rapid economic growth. As a result, it suffers unstainable inflation. The government or the country’s central bank will raise interest rates, and taxes and implement other policies to slow down the economy.
- Balance Sheet Recession: When individuals begin to feel the burden of high debt, they will slow their spending to pay off their debt. If this occurs on a large scale, the economy suffers and falls into recession.
- Supply-Side Shock Recession: When significant global events or crises occur, they can significantly affect supply chains. If there are shortages of essential products, the prices will skyrocket, leading to reduced consumer spending.
- Depression: A depression is one of the worst recessions, as it can last years. It can also profoundly impact the economy and society, severely affecting GDP and employment.
Economists look for specific signs to indicate a recession.
The most notable indicators include:
- Increased layoffs, widespread layoffs in prominent industries, and hiring freezes.
- Increased overall unemployment rate and durations of unemployment.
- Decreased consumer spending, especially in non-essential sectors.
- Decreased disposable income, once total income adjusts for inflation.
- Decreased trade and manufacturing activity and sales.
- Decreased retail sales.
- Increased gasoline prices.
- Higher than average interest rates.
Most recessions do not occur due to one factor, but a combination of multiple elements or a series of unfortunate events.
Any event that seriously affects government or consumer spending may trigger an environment favorable to recession.
These cases include wars, new international policies, economic sanctions, environmental disasters, market or infrastructure collapses, industry crashes, epidemics, and pandemics.
Triggers leading to recessions include high inflation, supply chain issues, low consumer confidence, high debts, low or stagnant levels of employment, and asset bubbles.
If numerous factors occur at the same time, economies cannot sustain healthy growth.
At this point, they start declining slowly, or governments force a recession to prevent unsustainable rapid growth.
A recession is not a disadvantageous period of time for everyone.
In fact, many individuals and businesses can benefit during a recession, including:
- Landlords or property management companies: Fewer people will sell their houses during a recession, and mortgages are harder for individuals to obtain.
Essential services: Medical care, grocery stores, consumer staple businesses, and public transportation companies do well during a recession. People will always need access to these goods and services.
- Alternative fuel companies: Many people invest in alternative fuels when gas prices rise.
- Investors: Savvy investors choosing the right stocks when prices are low during a recession can see large payoffs when the economy grows again.
During a recession, the best assets to own include:
- US Treasury Bonds
- Real Estate
- Investments in essential goods and services
Economists and financial experts consider these some of the safest things to own during a recession or depression.
Recessions can be alarming for many people and society at large.
However, if you know what to expect during a recession and how to prepare appropriately, you can thrive during an economic decline.