The US GDP finished the year 2022 with a positive growth rate of 2.9% in the fourth quarter. However, many experts and economists are concerned about the potential for a recession as interest rates continue to rise in an effort to curb inflation. A recent survey found that 46% of US adults think the country is already in a recession, and 25% expect one to occur within the next year. Additionally, 31% of respondents have started taking steps to prepare for a recession, but 50% have not yet taken any action despite wishing they could. The survey also found that those with higher incomes are more likely to have started preparing for a downturn.
What is a Recession?
A recession is a period of decline in economic activity, characterized by a decrease in GDP, employment, income, and other indicators. There is no official definition of recession, but most economists use the rule of thumb of two consecutive quarters of decline in GDP as a practical definition. The National Bureau of Economic Research (NBER) in the United States uses a broader definition and considers a number of measures of activity to determine the dates of recessions. The causes of recessions can be varied and can include changes in the prices of inputs, contractionary monetary or fiscal policies, financial market problems, and a decline in external demand. It is difficult to predict recessions as they have many potential causes and the patterns of various economic variables around recessions have been documented, but are not always reliable indicators of when a recession will occur.
The 2020 pandemic recession was caused by the outbreak of Covid-19 and resulted in a significant contraction of the economy and job loss in the United States. This is definitely not the first time that the economy has gone through such a downturn.
What has Caused Recessions in the US?
Historically, recessions in the United States have been caused by a combination of different factors, including economic, political, and social conditions with one common factor: a decrease in consumer and business spending.
The 2008 Great Recession was caused by the subprime mortgage crisis and the widespread use of derivatives. This resulted in a severe contraction of the global economy and was considered one of the worst recessions in recent history. Similarly, the 2001 Dot-Com bubble Burst Recession was caused by a boom and bust in dot-com businesses, which was further exacerbated by the 9/11 attacks. The 1990-1991 recession was caused by the 1989 savings and loan crisis and the Gulf War, while the 1980-1982 recession was a result of the Federal Reserve’s attempt to combat inflation and the Iranian oil embargo. Likewise, the 1973 Nixon/OPEC Embargo Recession was triggered by the OPEC oil embargo and actions taken by President Nixon, and the 1929 Great Depression was caused by a combination of factors including the Federal Reserve raising interest rates, the stock market crash, and a 10-year-long drought.
Global Recession
The IMF defines a global recession as “a decline in annual per-capita real world GDP (purchasing power parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: industrial production, trade, capital flows, oil consumption, unemployment rate, per-capita investment, and per-capita consumption”. Since World War II, there have been only four global recessions: 1975, 1982, 1991, and 2009. All lasted only a year, but 2008’s Great Recession was by far the worst due to the number of countries affected and the decline in real-world GDP per capita.
Can a US Recession affect the Globe?
A recession in the United States can have a domino effect on the global economy. The US is the world’s largest economy and is closely interconnected with other countries through trade, investment, and financial markets. Therefore, a recession in the US can lead to a decline in demand for goods and services from other countries, which can in turn slow down their own economic growth.
When the US economy slows down, it can lead to a decrease in exports for other countries, as the US is a major market for many of them. This can cause a decline in production and job loss in those countries, which can further slow down their economic growth. Additionally, a recession in the US can lead to a decrease in investment by US companies and individuals in other countries, which can also slow down their economic growth.
How to Prepare for a Recession?
By preparing in advance, you can help protect yourself and your financial future during a recession. Remember to focus on building your savings, paying off high-interest debt, diversifying your investments, being mindful of your spending, staying informed, updating your resume and skills, adapting yourself, and maintaining a good credit score.
Build an emergency fund. Having a savings cushion can help you weather a job loss or unexpected expenses. Aim to save at least three to six months of living expenses. As much as 25% of consumers don’t save for emergencies – which is definitely not a good idea.
Pay off high-interest debt. Credit card debt and other high-interest loans can become a significant burden during a recession. Prioritize paying off these debts to help reduce your financial stress.
Diversify your investments. A diversified portfolio can help mitigate the risks of a recession. Consider investing in a mix of stocks, bonds, and real estate.
Be mindful of your spending. As a recession can lead to job loss, it is important to keep an eye on your spending. Create a budget, cut unnecessary expenses, and try to save as much as possible.
Stay informed. Stay informed about the economy, and pay attention to any warning signs in the economy.
Update your resume and skills. In case of job loss, it’s important to be prepared. Update your resume and consider taking classes or training to improve your skills.
Be ready to adapt your business. A recession can lead to a decrease in demand for goods and services. Be ready to ‘adapt your business’ by identifying cost-cutting measures, new revenue streams, and potential new markets.
Maintain a good credit score. A good credit score can help you access loans and credit at more favorable rates during a recession. Make sure you pay your bills on time and avoid running up high balances on your credit cards.
