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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
What happens in a recession? During periods of recession, companies make fewer sales, and economic growth stalls or becomes nonexistent. To cut rising costs, organizations may be forced to lay off large portions of their staff, resulting in widespread unemployment.
What will happen if we go into a recession? ›
Recessions reduce opportunities: failed businesses, fewer jobs, and lower wages. Recessions normally don't happen every year, but they're not unusual. The National Bureau of Economic Research has tracked recessions in the U.S. all the way back to 1857.
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.
What normally happens during a recession? ›
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.
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.
Do things get cheaper in a recession? ›
While the prices of individual items may behave unpredictably due to unexpected economic factors, it is true that a recession might cause the prices of some items to fall. Because a recession means people usually have less disposable income, the demand for many items decreases, causing them to get cheaper.
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.
Who suffers the most during a recession? ›
We find that the impacts of the Great Recession are not uniform across demographic groups and have been felt most strongly for men, black and Hispanic workers, youth, and low-education workers.
Should I take my money out of the bank before 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.
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.
With benefits for the unemployed, the demand for food is not really affected and prices stay fairly stable. However, in a very deep global recession, demand for food may fall as people cut back on food purchases (especially the luxury end). This could cause food deflation like 1929-33.
Do you lose money in a recession? ›
Lower interest rates, stock market volatility, and potential job loss can drain your savings.
Where does money go in a recession? ›
During recessions, one of the primary culprits responsible for money vanishing into thin air is the collapse of banks. As financial institutions crumble under the weight of bad loans and dwindling assets, they often go belly up, taking the money entrusted to them along for the ride.
What are the consequences of a recession? ›
Businesses large and small face declines in sales and profits in a recession. Their efforts to cut costs may include layoffs and cuts in capital spending, marketing, and research. Recessions may curb credit access, slow collections, and spur business bankruptcies.
Is your money safe during a recession? ›
Banks during recessions FAQs
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.
How do you survive a recession? ›
Save your finances: The best way to survive a recession
To effectively grow your savings and plan, keep up with your budget, apply emergency fund basics and seek opportunities to improve your financial well-being.
