That dreaded word that begins with an R. Recession seems to be something that everyone always ends up blowing out of proportion and makes the public panic. It shows that economies aren’t growing and, in fact, are shrinking. People fear for their jobs and whether they have enough funds to last through it.
What is a recession exactly? The definition commonly used is when we’ve had two consecutive quarters of negative gross domestic product (GDP) growth. This, of course, varies, and it generally means that the economy is pulling back and shrinking. Recessions last up to a year and a half. Yet those affected by it may feel as if it is forever.
How can we tell if we’re heading into one?
Recessions are there to calm down the economic engine. They help to relieve the pressure build-up of rigorous economies and bring it back to more stable figures. By looking at the following signs, we can see that we’re approaching a recession.
Employment
As the jobs numbers start to slow down and unemployment begins to rise, this is representative of a weak job market, which means companies cannot support additional labor. Conversely, a strong labor market means more people are making money, and when it gets more fragile, it also affects the next point on our list.
Lower consumer spending
When people save more and spend less, this has a huge macroeconomic effect, as this means smaller profits for businesses. This can also start to inadvertently happen as interest rates go up because the cost of money goes up as well.
Markets come crashing down
Whether it’s the stock market (which is currently happening) or the real estate market, when major markets start to dip into the red, it’s a sign that we’re heading into a recession. Don’t be fooled by the record high prices in the current housing market, as that is primarily due to inflationary issues, which can also cause inflation.
What can be done?
Unfortunately, a recession is a natural end of a bullish economic cycle and is actually common and healthy for economies in the long term. For every eight to ten years of a strongly growing economy, the payoff is a recession. Yet there are ways to stave off making a recession into a potential depression. A depression can last for several years, marking a massive economic problem throughout the United States.
One of the optimum ways is to try to make the cost of money higher through the current rise in interest rates. Although it makes people feel unsteady about the markets, it helps to cool off inflation which will, in turn, diminish the cost of goods. This will hopefully result in improving spending habits that will boost profits and increase employment opportunities.
Everything is interconnected, and if you understand that this is only a temporary cyclical issue, you can also prepare for it and watch out as these, and other indicators show a weakening economy that will eventually lead to a recession.
