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- A recession is a significant decline in economic activity that can last months or even years.
- Most experts agree we aren’t in a recession yet, but that we could be headed for one in 2023.
- There are steps you can take to prepare emotionally and financially for a recession.
There’s been a lot of argument lately over whether the US economy is in a recession. If you’re still confused about the answer, you’re not alone.
This much we know for sure: Gross domestic product increased by 2.6% in the last quarter of 2022 and rose another 1.1% in Q1 2023. While this has led some experts to suspect that we’re heading towards a bull market, others counter that the continuous rise in inflation and increased real estate interest rates still indicate an approaching recession.
It’s important to note that no one can actually predict the direction the stock market will go in. While financial and stock market experts will speculate based on recent economic trends, the market is often unpredictable.
Financial experts can help you make smart investing decisions, even during recessions. If you’re interested in investing in the stock market or other assets, the best online financial advisors can help you reach your financial goals.
A recession is not the same as a depression
In general, a recession is defined as two consecutive quarters of negative GDP. However, many argue this definition is overly simplistic since it doesn’t take employment, income, sales, and a range of other factors into account.
The National Bureau of Economic Research (NBER) uses a broader definition, stating that a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Keep in mind that a recession is not the same as a depression, which is described as a more extended and severe version of a recession.
Are we in a recession?
While there’s still some debate, no, the US economy isn’t in a recession. Although inflation persists and interest rates continue to rise, there’s widespread agreement that the overall conditions consistent with a recession have not been met.
Anessa Custovic, PhD and chief investment officer of Cardinal Retirement Planning, says we may be heading toward a recession in 2023, but that it could be a mild one. “The labor market is so strong right now that we may be able to ride the recession out and not feel it too much,” she says.
The S&P 500 and Down Jones 2023
Parts of the market are on the up. After a low point in October 2022, the S&P 500 and Dow Jones have steadily begun recovering some of their losses. The S&P 500 stock index went up by 7% from Q4 2022 and Q1 2023, and it jumped a total of 14% since October.
That said, it’s not all good news. The Silicon Valley Bank collapse in March 2023 (the biggest bank failure since 2008), was shortly followed by the fall of Signature Bank and the First Republic. The cryptocurrency market has also taken a hit after the collapse of FTX and Voyager, and now Bittrex has filed for bankruptcy.
Conference Board Leading Index
Data from the Conference Board Leading Economic Index (LEI) foreshadows a possible recession starting midway through 2021. The LEI is at its lowest point since November 2020 after falling 0.5% in February 2023 and another by 1.2% in March. That’s a steep 4.5% drop since September.
The Conference Board Lagging Economic Index (LAG) also decreased in March by 0.2% despite a slight increase in February.
But the Conference Board Coincident Economic Index (CEI) was able to rise by 0.2% in February and another 0.2% in March.
conference-board.org
Unemployment Rates
April 2020 held an all-time high unemployment rate of 14.7%. Since then the unemployment rate has dropped nearly 11.2% and is around 3.4% as of April 2023. The total number of unemployed persons in the US also dropped from 5,839 in March to 5,657 in April.
conference-board.org
Food Inflation
In the US, food inflation fell from its peak of 11.4% in August 2022 to 8.5% in March and is now at its 15-month lowest of 7.7% in April 2023. Both inflation prices on food at home and food away from home have been steadily decreasing.
tradingeconomic.com
Economists and business leaders generally don’t think the US economy meets the criteria for a recession since employment and spending levels have remained relatively strong even while the GDP contracted. However, it’s difficult to say definitively, since income and spending have struggled to keep pace with inflation.
Will there be a recession in 2023?
Although there’s broad agreement that we aren’t yet in a recession, there has been deepening concern that we’re headed in that direction. A recent KPMG survey found that 91% of CEOs in the US anticipate there will be a recession within the year 2023.
The heads of the largest investment banks have been among those sounding the alarm.
For instance, JP Morgan CEO Jamie Dimon has been fairly vocal about the likelihood of a coming recession. He stated in June 2022 that there’s a 20% to 30% chance of a “harder recession” and a 20% to 30% chance of “something worse.”
Goldman Sachs CEO David Solomon echoed similar concerns during the company’s third-quarter earnings call. He said rising interest rates and geopolitical instability are affecting Goldman Sachs’ performance. And Solomon told CNBC there’s a “good chance” the US will enter a recession.
Who decides when a recession has started?
The National Bureau of Economic Research’s Business Cycle Committee is the authority that decides whether or not we’re in a recession. The NBER is a private, nonpartisan organization that analyzes major economic issues.
“The Business Cycle Committee labels all parts of the US economic cycle — the peak, the trough, etcetera,” Custovic explains. “They have a set of criteria that they use to identify a recession.”
And since the release of macroeconomic data usually lags the time periods for which it is collected, by the time the NBER does declare a recession, we’ve often already been in one for at least a few months.
How long does a recession last?
How long a recession lasts depends on its severity. But they don’t usually last as long as most people think. According to data from the NBER, the average recession since 1854 has lasted about 17 months.
Custovic points out that if we look at more recent examples — like from 1945 to 2020 — the average length of the economic contraction in the US is a little more than 10 months. “This suggests that the length of recessions are getting shorter now compared to historical ones,” she says.
How to prepare for a recession
The financial impact of a recession spreads throughout the US economy, with lower-income families getting hit the hardest. So it’s essential to prepare ahead of time.
This doesn’t just mean preparing yourself financially. And Custovic says it’s actually most important to prepare emotionally, as recessions can be frightening, particularly for retirees and investors.
“People can make emotional decisions like pulling all cash out of the market when they get scared, and history has proved over and over again this is not the right thing to do,” she says.
Since we never know how prolonged or severe a recession will be, it’s a good idea to prepare for the worst.
“This means having at least a few months’ worths of expenses saved up in case you become unemployed and need to search for a new job,” Custovic explains. “Also, I highly recommend holding off on any large-scale purchases until economic uncertainty fades.”
At the same time, Custovic recommends evaluating any investments you have to make sure you have a good mix of assets to reduce your risk of experiencing massive losses if a few of them underperform.
“Make sure your investments are well diversified and can weather the storm of economic uncertainty,” she says.
The best way to protect your assets and decrease your overall risk of losing value, make sure you have a diverse investment portfolio. If you’re struggling to diversify your investment portfolio, the best investment apps offer a range of investment choices, market access, educational resources, and low fees.
