What Happens in a Recession? (Recession 2024 Update)

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Last Updated on: 22nd January 2024, 11:08 pm

What should you do to be financially prepared to survive a future recession?

Many economists and market analysts see a recession looming in the near future. If their predictions are right, then it’s a good idea to take steps now to make sure that you’re financially secure and well-prepared to get yourself and your family through a severe downturn in the economy.

There are several things that people can easily do to protect, and even improve, their financial situation, so that they emerge better off on the other side of an economic storm.

What Is a Recession?

There are several definitions of “recession”, depending on what economist or market analyst you talk to. The simplest definition is “a period of time when the economy experiences negative growth”. A recession is usually most clearly marked by a contraction in Gross Domestic Product (GDP) – the total market value of goods and services produced within a specified timeframe that persists for at least several months.

In the United States, the non-profit organization, the National Bureau of Economic Research (NBER) is the entity that commonly announces the existence of a recession. However, the NBER’s tracking of recessionary conditions isn’t always very helpful, as it often doesn’t pronounce an economic recession until 12 to 18 months after a recession actually starts.

Historically, recessions have been notably shorter than periods of economic growth, typically lasting an average of approximately 10 months.

Signs of a Recession

The existence of a recession is determined by examining several economic data points, rather than just any single indicator. The NBER considers all of the following factors in tracking the economy:

Real Personal Income Falls

Real personal income is income adjusted for inflation, which more accurately indicates the actual purchasing power that individuals have. High inflation and the resulting rise in consumer prices – often further fueled by the government raising interest rates to try to slow down inflation – is often a major cause of a recession. Thus, when a recession occurs, average real personal income usually drops – and may be further reduced as employers cut back on staffing.

A recession may also widen the gap between the rich and the poor. It’s easier for wealthy individuals, who are less financially dependent on regular wages, to adjust to recessionary economic conditions.

Unemployment Rises

One typical effect of a recession is employers cutting back their workforce, either because demand for their products or services falls, or simply to reduce operating expenses.

For example, the pandemic-related recession of 2020 led to the unemployment rate spiking to nearly 15% in just the first few months of the COVID-19 pandemic.

Consumer Spending Falls

Reduced real income and higher rates of unemployment naturally lead to declines in retail sales. As consumer spending falls substantially, economic growth stalls and GDP begins to markedly contract.

Drops in retail sales have ripple effects across the whole of both the retail and wholesale sectors of the economy. Sharp declines in retail sales often lead to some businesses closing—which, of course, results in more unemployment and a consequent further drop in consumer spending.

Manufacturing and Industrial Production Drop

The decline in manufacturing and industrial production that usually accompanies a recession shows how various recessionary pressures are interrelated and tend to fuel one another. As employment and personal incomes decline, consumers reduce their spending. The decline in consumer demand leads manufacturers to cut back on production.

Declines in production may then lead to supply shortages that drive prices higher. Higher prices, coupled with lower real income, drive consumers to cut back even more on spending. That, in turn, pushes manufacturers to further reduce their production and workforce.

The Cycle of Recessionary Pressures

The economic trends outlined above combine to drive the economy further into a recession. This cycle of one effect of a recession driving additional effects may even result in one country’s recession eventually creating recessions in other countries.

The causes of the 2008 financial crisis – many subprime mortgage loans and overextended investment banks – were almost solely centered in the US. However, the negative impact on the US economy was so severe that it eventually spread a recession worldwide. Decreases in US exports led to shortages in other countries, driving prices higher. Credit tightening in the US ultimately led to less available credit worldwide.

The Yield Curve Becomes Inverted

One lesser-known signal of a looming recession is an inverted yield curve. The past 10 recessions in the US have all been preceded by an inverted yield curve arising.

Ordinarily, interest rates on short-term bonds are lower than the rates on long-term bonds, making the usual yield curve an upward one. The yield curve becomes inverted – with higher yields on short-term bonds – when general investor sentiment about future economic conditions turns strongly negative. Investors anticipate that a weak economy will lead to lower interest rates, which will more heavily impact longer-term bonds.

Investing Declines

A bear market in stocks and a recession are not synonymous. A bull market in stocks may exist during a recession. Conversely, there may be a bear market in stocks during periods of general economic growth. However, bear markets in stocks do often occur simultaneously with a recession, as individuals have less disposable income to invest.

Economic Cycles – Expansion to Recession to Expansion

Recession vs. Depression

The terms “recession” and “depression” are often used in a way that implies they’re two completely different economic conditions. However, the fact is that a depression is simply a more severe recession.

A depression is, essentially, a recession whose negative effects on the economy are deeper and more prolonged. For example, GDP might decline by 1-2% in a recession, but by 10% or more in a depression. Additionally, a weakened economy in a depression may last for several years, while recessions don’t usually last more than 18 months.

The economy began to recover from the 2008 financial crisis recession by late 2009, whereas the economy didn’t begin to substantially recover from the Great Depression of the 1930s until roughly a decade later.

Since the mid-1850s, there have been more than 30 periods labelled a “recession”, but only one period officially termed a “depression”.

How to Prepare for a Recession

There are, fortunately, several steps that you can take to protect yourself from the negative economic impacts of a recession.

1. Pay Down Outstanding Debt – The higher interest rates that typically accompany a recession mean that things such as high-interest rate credit cards will drain your finances more during a recession. By minimizing outstanding debt, you can minimize such negative effects.
   
2. Have an Emergency Fund – One of the most oft-repeated bits of advice from Personal Financial Advisors is to save up an “emergency fund” equal to at least six months of your normal living expenses. Having such reserve funds will go a long way to help protect you from possible reduced income or temporary unemployment resulting from a recession.
   
3. Establish More than One Source of Income – Having an additional part-time job, operating your own business, or establishing a regular income stream from investments (such as dividends or interest payments) offer additional protection against possible loss of income from your primary job.

What Are the Best Investments in a Recession?

What are the best investments to make when there’s a recession? Based on the investments that have shown the highest returns during previous recessions, the most valuable assets to hold in a recession include precious metals such as gold and silver, and – in stocks – consumer staples and healthcare companies.

Best Market Sectors to Invest in During a Recession

Primary characteristics of recessions—reduced personal income, high inflation, rising prices, less readily available credit, and higher unemployment—all create pressures on people to cut back on their spending. The majority of spending cutbacks that consumers make during a recession are typically on buying luxury goods or other non-essential purchases. For example, consumers may decide to postpone buying a new car or major household appliance.

However, regardless of the state of the economy, people still have to eat, buy basic consumer living goods (e.g., soap, toilet paper), and get needed medical care. Therefore, the safest stock market investments in a recession are usually companies whose business provides either consumer staples (for example, a company such as Walmart) or health care (such as hospitals or medical insurance companies).

Gold Shines During Recessions

There are two very good reasons that many smart investors look to gold during a recession. First, the rising inflation that nearly always accompanies a recession leads to reduced purchasing power of paper money. Gold has historically proven itself to be a valuable investment as a hedge against inflation. In fact, it’s one of the very few investments that has consistently kept pace with, or even stayed ahead of, rising inflation rates.

A second reason that many financial advisors recommend allocating more investment capital to investments in gold and silver is that gold prices usually have a negative correlation to stock prices. In other words, the price of gold often rises when overall stock prices are falling. A stark illustration of this occurred in the recession resulting from the 2008 financial crisis—the price of gold went up approximately 50%, from around $1,400 to $2,100 per ounce, while the S&P 500 Index fell by nearly 40%.

Image courtesy of NobleGoldInvestments.com

Another example: During the 1973-1975 recession that was sparked by the OPEC oil embargo, the price of gold skyrocketed, while high inflation drove the purchasing power of the US dollar sharply downward and stock prices fell precipitously.

As another potential recession looms, the price of gold has risen sharply since inflation began spiking higher in mid-2022. This was followed by another gold price surge in late 2023 amid fears of a protracted geopolitical conflict in the Middle East.

How to Invest in Gold

If you’re considering investing in gold, it’s a good idea to get professional help from precious metals experts, as there are many different ways to invest in gold and silver. Most investors are less familiar with investing in precious metals than they are with other types of investments, such as stocks or bonds.

One company that is very well-respected for offering solid investments in physical gold and silver, along with professional precious metals investing advice, is Noble Gold. Noble offers a wide variety of investable gold, silver, platinum, and palladium assets. Available investments at Noble Gold include IRS-approved coins and bullion suitable for investing in a gold IRA, as well as many of the most sought-after collectible gold and silver coins.

Noble Gold gives investors comprehensive information on precious metals investing, personalized investment advice, and assistance with setting up a precious metals IRA and storing gold and silver investments in secure vaults.

You can visit the Noble Gold website to get a free Gold and Silver Investing Guide.

Summary: Prepare For a Recession Today

Nearly everyone is eventually affected in some way by the consequences of an economic recession. However, a recession needn’t cause you financial disaster. Knowing what to expect and taking the proper steps to be prepared—such as having an emergency fund of savings and keeping credit usage to a minimum—can go a long way toward helping you get safely through a recession.

Smart management of your investment portfolio, including diversification with investments in alternative assets such as gold and silver products, may present a great opportunity to improve your finances and increase your wealth.

Recessions: Frequently Asked Questions (FAQs)