The Great Recession of 2008 caused widespread financial hardship – and not just in the United States. Individuals and families around the world struggled with unemployment, and there was a spike in bankruptcies and foreclosures.
This crisis was made worse by its long length. The recession stretched out for 18 months, and recovery was particularly slow.
Anyone who lived through this period dreads a repeat, which makes the current economic environment especially alarming. Over the past 12 – 18 months, high inflation prompted a sharp increase in interest rates, and the stock market has been unable to maintain its value. Is a recession coming? The experts say yes.
Is There a Recession Coming in 2023?
The consensus is that the United States cannot avoid a recession, but exactly when the next recession will occur and how long it will go on is still being debated.
When the market entered bear territory in 2022, a handful of media personalities suggested that the recession had already begun. They pointed out that the US Gross Domestic Product (GDP) went down by 1.6 percent in Q1 and 0.6 percent in Q2 of 2022 – one of the three key indicators of an economic downturn.
However, the vast majority of economists, analysts, and experts assured the country that no, the US had not entered a recession. The remaining criteria had not been met.
Personal income was still going up, and the unemployment rate was quite low. They said the opposite would occur in a true recession. They did agree that uncontrolled inflation was a worrying sign, and most indicated that a recession appeared unavoidable.
At first, most projected a recession in the second half of 2023, but now opinion is divided. Some stand firm that a recession is imminent, while others believe the next recession could arrive as late as the second half of 2024. What isn’t in question is the data, which indicates a coming dip in the economic cycle.
Critical points include:
After two quarters of negative growth in 2022, the GDP resumed expansion. However, the rate of expansion is slowing. In the first quarter of 2023, economic growth dropped to an estimated 1.1 percent annual rate – significantly lower than fourth-quarter 2022’s 2.6 percent. It wouldn’t take much to enter negative territory again – a key factor in identifying recession conditions.
Though inflation is ticking down from June 2022’s 40-year high of more than nine percent, it’s still uncomfortably high. In March 2023, the Consumer Price Index (CPI) showed inflation at five percent. The Federal Reserve has a goal of two percent inflation – and that may mean additional interest rate increases this year.
When inflation goes up, consumer purchasing power goes down, and businesses limit their investments. Retail sales went down by 1.2 percent in March 2023, and over the past 12 months, businesses reduced their investments by more than eight percent.
Low unemployment rates mean employers must pay more to attract and retain talent. That puts additional pressure on business investments. In response, a number of large organizations have decided to reduce their workforce, including Amazon, Meta, and Goldman Sachs. This suggests the unemployment rate is poised to rise – a second key indicator of recession.
Finally, personal income has gone up, but real income is not keeping pace with the rapid rise in inflation. For example, though income increased by 6.1 percent in December 2022, inflation increased by 6.4 percent. A decline in personal income as it relates to purchasing power is the third key indicator of a recession.
Taken together, the evidence overwhelmingly points to an impending recession – and it’s something of a self-fulfilling prophecy. As consumers and businesses see more signs of recession, they reduce spending. Reduced spending amplifies the conditions that make recession inevitable.
How Long Does a Recession Last?
The good news in all of the recession talk is that most experts agree the coming downturn will be mild. However, it may drag out for some time, relatively speaking.
Periods of economic decline typically turn around within a year. Since 1945, the longest was the Great Recession of 2008, which persisted for roughly 18 months. The shortest recession on record followed the 2020 market crash. That downturn lasted about two months before government action – including a massive economic stimulus package – prompted a sudden reversal.
The Federal Reserve will be in a delicate position if the recession comes in late 2023 rather than late 2024. One of the primary tactics for stimulating the economy is reducing interest rates. That is in direct contrast to the current inflation control plan which calls for steady interest rate increases.
Do Prices Go Down In A Recession?
Prices don’t always go down in a recession, but it is reasonable to assume some will in this case given the recent rate of inflation. This situation is referred to as a “deflationary recession,” and the cause comes down to basic economics.
During recessions, consumer and business demand for goods and services declines, so prices trend down to boost demand. However, that doesn’t mean all prices will drop. Luxury and discretionary items have historically become less expensive during a deflationary recession because consumers are more careful with their cash. Demand for essential items remains relatively steady, so prices for those goods and services may remain steady, as well.
Credit can be harder to come by, so demand for major purchases like cars may drop, bringing prices for large items down. Real estate prices tend to decline, which is good news for renters. Homeowners who wish to relocate aren’t as fortunate if they have to sell their existing home in a down market before buying a new one.
Though gas prices tend to decrease during a recession, this recession may play out differently. The Russian invasion of Ukraine has impacted the world’s oil supply, which could keep current gas prices stable.
How Do You Prepare for a Recession?
With all signs pointing to a recession within the next two years, many individuals and businesses are developing their strategies to survive challenging economic conditions. The most common element of such a strategy is to reduce expenses and cut spending. Consumers often prepare for a recession by paying down credit balances and stockpiling cash, and businesses focus on reducing headcount and delaying capital expenditures.
In many cases, both retail and commercial investors take profits from growth stocks and reinvest in recession-proof alternatives.
Energy stocks are a smart choice during a recession, as are consumer staples like food and personal care. Some ambitious investors structure their portfolios in such a way that they can access plenty of cash when the market drops. Then, they buy stocks at rock-bottom prices, and they enjoy large gains when the market recovers.
How Much Cash Should Hold In A Recession?
There is no bad time to have an emergency savings account with enough cash to cover three to six months of expenses. Saving enough to survive a year is even better with a recession looming. The biggest risk for average consumers during a recession is job loss, and the goal is to avoid going into debt during periods of unemployment.
In addition to building an emergency savings account, there are other ways to prepare for possible job loss. These include expanding skills through training and education, updating resumes and portfolios, and building a robust network of contacts to assist with a job search, should the need arise.
The main point to remember is that recessions always end, and the economy will recover. As it does, there will be new employment opportunities and virtually unlimited options for making profitable investments.
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