The US economy is not currently in a recession, according to the National Bureau of Economic Research (NBER), which is the official arbiter of recessions in the United States.
(IMPORTANT NOTE: In July 2022, there was some funny business that involved someone with an IP address in a DC government office changing the definition of “recession” on Wikipedia. Why would someone want to do such a thing if we are not in a recession, or close to it? Things that make you go hmmmmm.)
Even though the official stance is that we are not in a recession, there is growing concern that one could be on the horizon.
There are a number of factors that could lead to a recession, or prolong one if we are already in it.
High inflation
Inflation is currently at a 40-year high, which is putting a strain on household budgets and businesses. As the cost of necessities increases, people have less money for other things.
Rising interest rates
The Federal Reserve is aggressively raising interest rates in an effort to combat inflation. Their stated goal is to create some economic stress, which is kind of messed up when you think about it. The actions from the Fed are designed to slow economic growth. Thanks, Fed!
The war in Ukraine
The war in Ukraine is causing economic uncertainty and disrupting global supply chains. However, it is important to remember that inflation was here LONG before the war started.
The talk of a “Putin price hike” is pure gaslighting from your government. They are hoping you forget that everything was more expensive before the war started. They think you are dumb! But you are clearly not dumb because you are reading this right now. 😘
Pandemic hangover
As it turns out, printing many billions of dollars out of thin air had some consequences. I have no judgment about the decision to print so much money because we had to do what we had to do in order to survive and take care of our people.
However, the long-term effects of injecting SO MUCH money into the system are starting to show up.
What is a “mild” recession?
If a recession does occur, many believe it is likely to be mild.
The US economy is currently strong, with low unemployment and strong consumer spending. The low unemployment rate is creating a bit of a conundrum for the Fed. They keep raising interest rates, hoping to create some unemployment, but it isn’t working (yet).
Keep in mind that even a mild recession can have a significant impact on businesses and individuals. It is not something to be celebrated.
How long do recessions last?
The average recession lasts for about 11 months, but they can range in length from a few months to several years. The Great Depression, which lasted from 1929 to 1939, was the longest and most severe recession in US history.
How can you make money in a recession?
There are a number of ways to make money in a recession. It can be hard to think about making money if you are struggling to pay your bills, but more wealth changes hands during tough economic times than good economic times. Which side of the equation do you want to be on this time?
Investing in defensive stocks
Defensive stocks are companies that are less sensitive to economic downturns. Examples of defensive stocks include consumer staples companies, such as food and beverage companies, insurance companies and healthcare companies. People spend money on those regardless of the state of the economy.
Buying assets that are likely to appreciate in value
During a recession, the prices of assets such as real estate and precious metals can often decline. However, these assets can also appreciate in value during a recession, if investors believe that they are a good long-term investment.
The money is made when you BUY, not when you SELL. Negotiating a good deal for yourself is the key to success here. It may take some patience and some practice, but it’s well worth it to find a great deal.
Starting your own business
A recession can be a good time to start your own business, as there is less competition from other businesses. However, it is important to do your research and make sure that you have a solid business plan before you start.
Be sure to apply the same sort thinking that you use when choosing defensive stocks. What sorts of things are people ALWAYS buying? Pizza, haircuts, automobile expenses…the list goes on.
What causes recessions, anyway?
There are a number of factors that can cause a recession.
A decline in consumer spending
When consumers stop spending money, businesses start to slow down production and lay off workers. This can lead to a negative feedback loop that can cause the economy to spiral into a recession.
A decline in investment
When businesses stop investing in new projects, it can lead to a decline in economic growth. This can also lead to a recession.
A financial crisis
A financial crisis, such as the one that occurred in 2008, can cause a recession by disrupting the flow of credit and investment.
Foreign policy side note:
There is something that is conspicuously NOT on the list of things that cause a recession: Vladimir Putin.
We do not buy anything from Russia because they don’t produce anything we need, so the idea that Putin is to blame for a recession in the US is laughable at best.
Europe has experienced some economic stress due to their reliance on Russian gas and oil, but that is not a US problem by itself (we made it our problem, for better or worse).
Recessions are a normal part of the economic cycle. However, they can have a significant impact on businesses and individuals.
Now what?
It is important to be prepared for a recession by having a financial cushion and by investing in assets that are likely to appreciate in value.
The economy always comes back around. Personally, I’m still dollar cost averaging Vanguard index funds and I won’t stop doing that no matter what happens in the economy. Stay the course! Be strong! And, most importantly, don’t let your emotions knock you off track.