We are sure we have all heard the news – the economy is faltering and a recession may be looming. Recessions are a normal part of the economic cycle, and worrying would not change that. However, with some smart planning and preparation, you can weather the storm and come out stronger on the other side.
Recessions could be challenging, but if you go into it with the right mindset and strategies, you’ll find that it isn’t something to worry about long term. As the old saying goes, “This too shall pass.“
Recessions Happen Often
Economies go through periods of expansion and periods of decline as the balance of supply and demand changes over time.
The Economy Cycles
Recessions happen on a regular basis in a free market system as the economy goes through natural boom-and-bust cycles. According to the National Bureau of Economic Research (NBER) data, the average length of a recession in the US is around 10 months.
It happens, and it will end
Recessions are a normal part of the economic cycle. Economies go through periods of growth and periods of contraction. The most recent recession was caused by COVID-19 and the result was economic shutdowns around the world. But recessions don’t last forever. Economies always start growing again.
Things will likely get harder before they get better
Recoveries take time
There are lags in the economy after a downturn begins. Jobs, spending, and consumer confidence trends tend to improve gradually — not all at once. Some economists estimate that a full recovery from any current economic situation may take years.
It’s normal to experience hardship during that initial period. Bills pile up, jobs may be lost, and opportunities seem scarce. But keep in perspective: recessions are temporary challenges within the broader cycle of economic growth.
The stock market will rebound
Stock markets have always rebounded after previous recessions and bear markets. Investors who stay the course and avoid panic selling usually come out ahead in the long run. Stocks represent fractional ownership in companies, and companies continue producing profits even during downturns.
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Living habits will likely change
Past recessions have spurred frugality in many ways that actually improve quality of life. People dine out less, socialize more at home, pursue inexpensive hobbies, garden more, and simplify how they live. Once the habits form during hard times, many people find they prefer this “new normal” and carry it forward beyond the recovery.
The fundamentals remain strong
Even through a recession, things like infrastructure, technology, education levels, and innovation keeps on improving. Companies have adapted to remote work and found new ways to operate online. Our underlying strengths as an economy remain intact and will power the recovery.
You have more control than you think
While the economy is largely beyond our control individually, you have power over your spending, saving habits, resilience, skills, career path, and outlook. Focus on the factors within your control and do what you can to adapt and weather the storm. Perspective, patience, and positivity will serve you well.
Unemployment rates will climb
When economic activity declines, businesses tend to lay off workers to cut costs. This causes jobless claims to increase and unemployment rates to rise.
Higher unemployment is a natural outcome of recessions, not a permanent condition. As the economy recovers, businesses begin hiring again and putting people back to work.
There will still be opportunities during downturns, though they may require adaptability, experience, and networking. Focus on skills that are recession-proof and in demand.
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Inflation may recede…for now
As consumer demand and spending drop due to job insecurity, inflationary pressures often ease up. This can provide temporary relief in the form of lower prices for goods and services.
However, this is not sustainable
Without economic growth, tax revenues decrease, pushing the government to ramp up money printing and spending. This tends to seed the next bout of high inflation down the road.
Long-term, moderate, and stable inflation is ideal for a healthy economy. Severe deflation or runaway inflation are threats to watch out for.
Government deficits will likely balloon
To stimulate the economy during recessions, governments typically increase spending, cut taxes, and run larger deficits. This pumps money into the system and provides a safety net for those struggling.
Substantial deficits come at a cost
They accumulate as debt that must eventually be repaid through higher taxes, spending cuts, or money creation. Large and persistent deficits also weigh on long-term economic prospects.
While deficit spending has its place during downturns, responsible fiscal policies are needed during good times to prepare fiscal buffers for future recessions.
Some businesses and industries will fail
When customers stop spending, many companies see their revenues shrink and cash reserves dry up. Some businesses simply can’t weather the economic storm and are forced to shut down.
This is a natural part of “creative destruction”
The economy cannot stay productive without weak companies failing to make way for new, improved businesses. While job losses are never easy, the reallocation of resources to more efficient uses ultimately paves the way for future growth.
Don’t take business failures personally. Focus on helping the businesses you believe in to adjust and survive while keeping an eye out for new opportunities as the economy rebounds.
Don’t catastrophize — stay grounded
Recessions are challenging but part of a larger economic cycle that includes growth, innovation, and opportunity.
Focus on the things within your control:
- Maintain a frugal but sensible budget
- Build skills that are in demand
- Network and explore new avenues
- Prepare your finances for flexibility
- Take care of your mental and physical health
- Help others who are struggling
We believe focusing on positivity is key–worrying about things you can’t change won’t help. Take practical steps to minimize the impact and focus on what you can control in your own financial life. The economy will bounce back after some time and become even better than before. You’ve got this!