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Rising interest rates and economic uncertainty are leading many Americans to worry about another recession. During a recession, people may experience significant impacts on their daily lives. Everything from groceries to shoes is often more expensive, and workers may have less job security.
Recession Definition
Economists have varying opinions about how to define a recession. The National Bureau of Economic Research (NBER) defines a recession as a significant decline that lasts for more than a few months and affects the broader economy, not just a particular sector. In other words, almost every industry will experience its impact.
Recessions are also defined as the period between the peak of economic activity and the economy’s lowest point. They’re usually relatively brief. Since World War II ended, the average recession has lasted 10 months.
The NBER doesn’t usually call an economic decline an actual recession until six to 18 months after the recession’s beginning. That means consumers could be experiencing its effects long before it becomes official.
What Happens During a Recession: 5 Indicators
There is no one definitive sign that a recession is occurring, but NBER’s Business Cycle Dating Committee looks at the following indicators when deciding to declare a recession:
Personal Income Minus Government Transfers
When the economy is in a recession, incomes stagnate or drop due to employers slashing hours or reducing their workforce. Income inequality may also worsen, as the wealthy are often less impacted by a recession than the middle or lower classes.
Employment
In a recession, the unemployment rate—the percentage of the total labor force that is unemployed but actively seeking work—tends to increase as companies cut back on staff to reduce their expenses.
For example, the U.S. Bureau of Labor Statistics reported that unemployment reached a high of 14.7% in April 2020, the peak of the recession during the Covid-19 pandemic.
Industrial Production/Manufacturing
In response to the rising cost of raw materials, businesses usually cut back on production during a recession, and manufacturing activity declines. This change can lead to a decrease in exports and an overall decrease in economic activity.
For example, manufacturing activity in the U.S. fell sharply during the Great Recession, as businesses reduced production and laid off workers. During this particular recession, employment in manufacturing declined by 10% and the manufacturing sector only began to recover in 2010, after the recession had officially ended.
Consumer Spending
One aspect of consumer spending—retail sales—is the total amount of money consumers spend on goods and services. During a recession, retail sales generally decrease as people have less money to spend. As retail sales decline, the impact on the economy can be substantial. Businesses may have to lay off workers to reduce costs, and some businesses may close.
How a Recession May Affect You
Whether an economic downtown has officially been declared a recession or not, the impacts of an impending recession can affect your daily life. Some common ways people are impacted include:
- Cost of living increases. When inflation contributes to a recession, you may find that household essentials like groceries, gasoline and clothes are more expensive than they used to be. Higher prices make it harder to make ends meet, so individuals often turn to strict budgets and cuts in discretionary spending.
- Job loss or reduction in hours. In a recession, companies often reduce their staffing levels to save money. You may risk losing your job or experiencing a reduction in hours.
- Difficulty finding employment. For a while now, workers have controlled the employment market. They could secure new roles with higher salaries and more perks as employers competed for a limited pool of workers. During a recession, that’s likely to change, with competition for the few opening roles tougher and the ability to find a new job taking significantly longer.
Recessions are common—they happen every few years after the economy reaches its peak. Although it can be scary if you haven’t experienced one before, you can get through most economic changes by taking steps like planning, saving and reducing your spending.
FAQs
Measurable levels of spending and investment are likely to drop, and a natural downward pressure on prices may occur as aggregate demand slumps. GDP declines and unemployment rates rise because companies lay off workers to reduce costs. At the microeconomic level, firms experience declining margins during a recession.
What happens during the recession? ›
Some people might lose their jobs, and unemployment could rise. Others may find it harder to be promoted, or to get big enough pay rises to keep pace with price increases. However, the pain of a recession is typically not felt equally across society, and inequality can increase.
What happens during a recession quizlet? ›
A recession occurs when there is a sustained period of falling income. During a recession there is high unemployment, which means output is lowered because consumption goes down.
What happens to most people during a recession? ›
With employers looking to make savings, people may find it harder to find work or get a pay rise. As businesses and shops close or shrink their workforce, people may lose their jobs. Getting a mortgage or loan during a recession will prove hard as banks tighten their lending criteria.
Can you lose money in a savings account during a recession? ›
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution. What happens if my bank fails during a recession?
Do you lose money in a recession? ›
During a recession, stock prices typically plummet. The markets can be volatile with share prices experiencing wild swings. Investors react quickly to any hint of news—either good or bad—and the flight to safety can cause some investors to pull their money out of the stock market entirely.
What happens to food prices in a recession? ›
Because people have less money to spend, demand falls, taking the prices of many goods and services with it. Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same.
Who is hardest hit in a recession? ›
Industries affected most include retail, restaurants, travel/tourism, leisure/hospitality, service purveyors, real estate, & manufacturing/warehouse.
Can banks seize your money if the economy fails? ›
The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.
Do things get cheaper in a recession? ›
During recessions, of course, consumers set stricter priorities and reduce their spending. As sales start to drop, businesses typically cut costs, reduce prices, and postpone new investments.
Should I pull my money out of my bank? It doesn't make sense to take all your money out of a bank, said Jay Hatfield, CEO at Infrastructure Capital Advisors and portfolio manager of the InfraCap Equity Income ETF. But make sure your bank is insured by the FDIC, which most large banks are.
Is it better to have cash or property in a recession? ›
Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
Where is your money safest during a recession? ›
Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
This usually results in job losses and an increase in the unemployment rate. While there is no single definition of recession, it is generally agreed that a recession occurs when there is a period of reduced output and a significant increase in the unemployment rate. Views differ about how to best identify this.
How does a recession affect the average person? ›
Increased stress all around. One of the most prevalent ways that recessions affect the average person is simply that stress goes up. It doesn't matter if you're comfortable in your job security and have a hefty financial cushion, or if you're struggling to make ends meet and have $100 in your savings account.
Who benefits in a recession? ›
Lower prices — A recession often hits after a long period of sky-high consumer prices. At the onset of a recession, these prices suddenly drop, balancing out previous long inflationary costs. As a result, people on fixed incomes can benefit from new, lower prices, including real estate sales.
