An economic recession sends ripple effects across the economy. Although everyone feels the effects, most can only wait for sunnier economic times to appear. Knowing how long a recession can last can help you weather the storm.A financial advisorcan guide you in making smart investment moves for your portfolio in a recession.
What Is a Recession?
A recession is a serious economic downturn that lasts for more than a few months. Generally, an economic downturn isn’t considered a recession until the economy has seen negative growth for at least two quarters. Economic growth is measured by gross domestic product (GDP).
You might see a rising unemployment rate or falling stock prices during a recession. Investors have fewer funds on hand to invest and often lack the necessary confidence to invest in the market.
One important indicator that acts as a warning sign for a recession includes an inverted yield curve. In this case, the long-term government bond yield is lower than the short-term government bond yield. This inversion indicates a lack of faith in the economic times. Since 1970, an inverted yield curve has happened before every U.S. recession.
A few other indicators include closing businesses and stock market contractions.
How Long Do Recessions Last?
According to the National Bureau of Economic Research (NBER), the average length of recessions since World War II has been approximately 11 months.
But the exact length of a recession is difficult to predict.In general, a recession lasts anywhere from six to 18 months.
For example, the Great Recession that started in December 2007 lasted 18 months. But the recession prompted by the pandemic in 2020 only lasted two months. When a recession is on the horizon, it’s impossible to know how long it will last.
When Does a Recession Become a Depression?
The length of a recession varies. But where’s the line between a recession and a depression?
In general, a depression is an economic downturn that lasts longer than expected or has extremely severe consequences. But there’s not a technical definition that distinguishes a depression from a recession.
For example, the Great Depression and Great Recession both made names for themselves. But the negative impacts of the Great Depression were much larger than the impacts of the Great Recession. That’s because the Great Depression lasted 10 years! That’s significantly longer than any recession on the books.
How to Prepare for a Recession
In an extended downturn, almost every household feels the pinch of a tighter budget. Financial security can be lost in the wake of unemployment spikes and plummeting retirement savings. But the reality is that recessions are part of the business cycle. Instead of hoping one never comes, preparing for a recession is better.Here are four common strategies to prepare for a recession:
Have an emergency fund.Rising unemployment is a hallmark of most recessions. If possible, build an emergency fund to cushion the financial fallout in case of a layoff. Most experts recommend saving between three to twelve months of expenses. But the right amount varies based on your risk tolerance and income stability.
Consider your risk tolerance.The right investment portfolio carefully considers your risk tolerance. Since heavy losses are likely during a recession, you need to be able to stay the course.
Invest in alternative assets.If you don’t want to have all of your eggs in the stock market, then look at other options. Real estate and precious metals are a few potential investment options to consider.
Don’t panic sell.If you have a portfolio of assets, don’t panic. Although tempting to sell off your assets at the beginning of a recession, it’s often better to stay the course. Jumping in and out of the marketin an attempt to time the market often leads to lower returns over the long term.
Bottom Line
If you are investing with a recession on the horizon, don’t panic. The good news is that recessions are part of a normal economic cycle. It’s likely that the economy will pull out of a recession within a year. But staying financially comfortable during tumultuous times can be a challenge. A financial advisor can help you navigate a changing economy with your long-term goals in mind.
Investment Planning Tips
- A financial advisor can help you make smart investment moves for your portfolio. SmartAsset’s free tool matches you with up to three financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A recession can test your risk tolerance limits. Determine the appropriate asset allocation strategy for your risk tolerance before a recession hits. Take a look at our free asset allocation calculator to consider optimal portfolio strategies.
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FAQs
In general, a recession lasts anywhere from six to 18 months.
How long do recessions typically last? ›
3. How long do recessions last? The good news is that recessions generally haven't lasted very long. Our analysis of 11 cycles since 1950 shows that recessions have persisted between two and 18 months, with the average spanning about 10 months.
Are we in a recession in 2024? ›
Economists predict another year of slow growth around the world in 2024. While the risk of a global recession is lower in the year ahead, two G7 economies dipped into recession at the end of 2023.
How long did the recession last in the USA? ›
The average recession lasted 22 months, and the average expansion 27. From 1919 to 1945, there were six cycles; recessions lasted an average 18 months and expansions for 35. From 1945 to 2001, and 10 cycles, recessions lasted an average 10 months and expansions an average of 57 months.
Will interest rates go down if there is a recession? ›
Do Interest Rates Rise or Fall in a Recession? Interest rates usually fall during a recession. Historically, the economy typically grows until interest rates are hiked to cool down price inflation and the soaring cost of living. Often, this results in a recession and a return to low interest rates to stimulate growth.
How long did it take to recover from the 2008 recession? ›
Following these policies, the economy gradually recovered. Real GDP bottomed out in the second quarter of 2009 and regained its pre-recession peak in the second quarter of 2011, 3½ years after the initial onset of the official recession. Financial markets recovered as the flood of liquidity washed over Wall Street.
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.
Will there be a recession in 2025 in the USA? ›
The research of the Federal Reserve Bank of New York, currently puts the probability of a U.S. recession before February 2025 at 58%, that's about as high as a forward-looking recession probability has been on this model since the 1980s.
How will the US economy be in 5 years? ›
The Federal Budget
Measured in relation to gross domestic product (GDP), the deficit amounts to 5.6 percent in 2024, grows to 6.1 percent in 2025, and then shrinks to 5.2 percent in 2027 and 2028. After 2028, deficits climb as a percentage of GDP, returning to 6.1 percent in 2034.
How does a recession end? ›
A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” Consistent with this definition, the Committee focuses on a comprehensive set of measures—including not only GDP, but also employment, income, sales, and industrial production—to analyze the trends in economic ...
The Long Depression was, by a large margin, the longest-lasting recession in U.S. history. It began in the U.S. with the Panic of 1873, and lasted for over five years.
What was the worst recession in history? ›
The 2009 global recession, also known as the Great Recession, was by far the worst of the four postwar recessions, both in terms of the number of countries affected and the decline in real World GDP per capita.
Is this recession worse than 2008? ›
The events of 2008 were too fast and tumultuous to bet on; but, according to CNN, Moody's and Goldman Sachs predict that 2023 won't see a thunderous crash like the one that sunk the global economy in 2008.
What gets cheaper during a recession? ›
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Is it better to have cash or property in a recession? ›
Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.
What not to do during a recession? ›
Avoid becoming a co-signer on a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt. Don't quit your job if you aren't prepared for a long search for a new one. If you own your own business, consider postponing spending on capital improvements and taking on new debt until the recovery has begun.
How long does it usually take to get out of a recession? ›
Although each recession has unique features, recessions often exhibit a number of common characteristics: They typically last about a year and often result in a significant output cost. In particular, a recession is usually associated with a decline of 2 percent in GDP.
How many years does it take to recover from recession? ›
A typical recession persists for about a year, while an expansion often lasts more than 5 years. Recoveries from recessions are strong, reflecting the presence of a bounce-back effect.
How long do real estate recessions last? ›
How long do housing market downturns last and how do they end? According to data from the National Bureau of Economic Research (NBER) going back to 1854, an average recession lasts about 17 months.
