Recession – A significant, widespread, and prolonged downturn in economic growth and activity. Recessions usually produce declines in economic output, consumer demand, and employment. A popular rule of thumb to indicate when a recession has started is when there are two consecutive quarters of decline in GDP.
The three most recent recessions were the early 2000s Recession, the Great Recession, and the COVID-19 Recession.
The Early 2000s Recession lasted 8 months from March 2001 to November 2001. It had been a full decade since the last recession. During the Early 2000’s Recession the unemployment rate peaked at 6.3% and GDP declined 0.3%. Up to this point in time the 1990s were the longest period of economic growth in American history. The cause: The collapse of the dot-com bubble, a decline in business expenditure and investments, and the September 11th terrorist attacks brought this decade of growth to a grinding halt. However, this recession was quite short and shallow in its effects.
The Great Recession lasted 1 year and 6 months from December 2007 to June 2009. A total of 6 years and 1 month since the early 2000’s recession. During the Great Recession the unemployment rate peaked at 10% and GDP declined 5.1%. The cause: A multinational subprime mortgage crisis was triggered by a decline in United States’ home prices after the housing bubble collapse. The collapse of the housing market led to an abundance of mortgage delinquencies, foreclosures, and the devaluation of housing-related securities. The fall of housing related assets contributed to a global financial crisis where even oil and food prices soared to heights previously unseen. This crisis eventually led to the collapse of many of the United States’ largest financial institutions: Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG. It also led to a crisis in the automobile industry. Forcing the US government to respond with unheard-of sums of relief from the $700 billion bank bailout to the $787 billion fiscal stimulus package.
The COVID-19 Recession lasted 2 months from February 2020 to April 2020. A total of 10 years and 8 months since the Great Recession. During the COVID-19 Recession the unemployment rate peaked at 14.7% and GDP declined 19.2%. The cause: The COVID-19 pandemic had catastrophic economic impacts and were especially severe after the first quarter of 2020. More than 24 million people lost jobs in the US in just a three week span in April 2020. It is still unknown exactly how much damage has been done as the numbers are still being tallied up. However, even though this recession was hard hitting economically it remains one of the shortest recessions in American history. It is hypothesized that this recession was so short lived thanks to the continuing and even expansion of online purchases, zero percent interest rates, and the printing of huge amounts of money by the Fed to prop the stock market during this tumultuous time.
We have already met the textbook definition for a recession. No one can really predict when a recession will happen, all we can do is continuously prepare our finances for an economic downturn. A sort of insurance policy that we implement ourselves. For us to be fully prepared for a recession we need to have a few things in order.
Firstly, you will need to make sure that you have an emergency fund for a minimum of 6 months, but preferably a year or longer. This will help cover bare minimum living expenses if your main source of income is interrupted for whatever reason. In order to do this appropriately you need to know what your financial priorities are. You also need to take note of how much and what kind of debt that you carry. In economic downturns usually there is not any leniency on paying back your debts. Therefore, you need to list out and calculate how much debt you are required to pay back each month. This total will need to be added to your normal everyday living expenses as to correctly calculate how much money you will need to have saved up in order to survive 6 to 12 months or longer with no income. Many companies will have big waves of layoffs during recessions in order to keep their overhead down so that they can continue making money. There is not any guarantee that you will be able to find another job if your current one lays you off. That is why it is extremely important that you set yourself up to be financially secure on your own for a good amount of time.
Another way to make sure that you are financially secure is to find ways of making money on your own. Whether that be through a trade you already know or can learn or starting up your own full-fledged company. Many great companies are formed during economic hardships. If you can find a way to build a profitable company during hard times, then you are almost guaranteed to knock it out of the park once the economy is flowing normally again. As always remember to maintain your emotions and not let them guide you and to always be greedy when others are fearful and fearful when others are greedy. Just because there is a recession does not mean that you cannot find a way to prosper!
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