With increasing unemployment, an inverted yield curve, a drop in US GDP, and the recent conflict between Russia and Ukraine, the next economic recession may seem imminent. Though some experts are of the opinion that the facts are really exaggerated and there is nothing to worry about.
Regardless of what happens in the near future, it is always a good idea to plan your recession proof investment strategy in advance so that you can maintain a healthy lifestyle when the next recession arrives.
What is recession? What is the early sign of recession?
The term recession is a macroeconomic term, the term recession refers to the significant economic decline in a particular region. It’s usually conceded as two consecutive quarters of economic decline, as reflected by GDP which indicates the rising unemployment.
Here consecutive meaning is two or more things following each other. The National Bureau of Economic Research (NBER), officially declares recessions and explains the two consecutive quarters of decline.
To define gdp meaning, it is the total monetary value of all goods and services produced in a country. The nber result tells that a recession is a significant decline in an economic activity laid out across the economy, abiding for a few months, results in GDP, employment, earning, industrial production and sales. It lasts for a few months.
You may ask how long a recession last? what was the longest recession? Records show that recessions lasted for a minimum of 2 months to a maximum of 18 months 2007 recession was the longest time of the 18 months recession.
Recessions are sometimes unpredictable. If recessions were predictable, the government would take action to work hard in preventing them in the beginning. However, there are a few early signs that may cause recessions.
Having knowledge of early signs of a recession can even help prepare for preventing a recession, so that you don’t have to struggle when the economic decline happens. So, what are the signs of economic recession? Have a look at those signs which tell us a recession is coming:
- Slow down in GDP: A recession is an economic downfall and the measurement of economic growth is known as gross domestic production (GDP). A slowdown in GDP may cause a recession in the economy.
It could be a question: what happens to real gdp during a recession? a recession occurs when real gdp declines. Real GDP is the total value of an economy (total produced goods and services ) at a particular time. Negative real GDP shows a clear image of dropping productivity. a recession is always associated with declining nominal gdp.
- Rising of Unemployment: during recession unemployment rises. If a sudden increase in unemployment is noticed, it means a recession is near the door of the economy. This is because when there are downfalls in businesses, they lose their revenue, and people lose their jobs.
Can revenue deficits cause recessions? Yes it can, when businesses lose revenue, downfall in GDP is noticed too, and a recession happens. In turn, unemployed people will have very little money, so they cut their expenses short, which leads to a declining GDP which one of the following causes of recession.
- Decreasing stock performance: The stock market is always changeable, but that doesn’t mean it’s a great indicator of a recession because drops are common. If a poor stock performance continues for a long period, that may lead to a recession.
Now, you might be thinking how much do stocks drop in a recession? Records show that the stock market has faced almost a 35% drop during a recession in the past.
- Losing of consumers’ confidence: Consumers are the backbone of a country’s economy. Without them, the economy would have a crash on it. when there is recession in economy sales will decrease. if consumer income declines then the demand for commodities decreases.
Consumers lose faith in the economy, they may cut their expenditures to some extent to have relief from the financial crisis and recession. Slow downing of expenditures is the recession why market is going down, it may be an early signal to a recession.
- Yield curve: The yield curve measures the relationship between the interest rates of short-term and long-term fixed-income securities issued by the U.S. Treasury.
We may have a query that is ‘why inverted yield curve signals recession?’ inverted yield curve occurs when the interest rates of short-term securities are exceeded by the interest rates of long-term securities. an economic recession begins when this happens.
- Drop-in Leading Economic Index (LEI): Every month, the LEI publishes some current factors like stock performance, unemployment and GDP to indicate the future economy. If the LEI shows a decline in the economy, it could be a warning of a recession.
- Inflation in precious materials: we notice a hike in the price of precious materials like gold and silver. what happens to gold prices in a recession? gold prices during recession increase more than normal, which can be an indicator of recession.
What to do in economic recession?
During a recession, expenditures are restricted by the people. The decrease in spending slows down and unemployment increases in the period of recession. how much the recession is generally carried out in a country is the main thing to think about and to take precautions regarding this.
However, if the recession arrives or not, there are always many ways to plan your budget for any kind of economic change. Building your emergency funds, managing debts and re-evaluating investment are the main things to keep for fighting an economic crisis. So, how to survive in the period of recession? Here recession period meaning when a recession is going on. Let’s have a look;
- Slow down your lifestyle: You need to slow down your expenses during recession. Stop purchasing unnecessary clothes and ornaments just because you are passionate about having those when a country is in recession.
- Re-evaluate your monthly budget: Evaluate your budget every month to watch what kind of expenses could be stopped during recession. First of all, you need to be clear with what is the appropriate budget policy during recession? how to save money during a recession? Look over if you spend too much on your clothes. Cut them into short, buy only what you need and avoid purchasing expensive brand products to save money.
- Save extra for your emergency fund: After cutting unnecessary things from expenditures, take good care of increasing the savings, and budget as much as possible. during recession public expenditure should be reduced. Try to put at least 30% of your earnings into your emergency fund so that you can stay strong when the recession arrives.
- Be conscious of your usual contribution: Whether you have a 401k setup or not, always endeavour to handle your budgeted contributions. While a recession is looming, it can be terrifying, but maintaining these can benefit you in the long term. During recession times, ignore checking your performance daily and keep your future goals in mind.
- Make ways to earn extra cash: during a recession one should start a passion project for extra income. To answer ‘how to make extra money during a recession?’ Invest time in creating some projects like an online course, blog or article writing, video editing, Online catalogue making etc, in which you have mastered skills. Deposit your extra earnings into your savings account for maintaining recession and financial crisis.
- Focus on decision making: It is necessary to be conscious of your financial steps during an economic recession. Take advice from an expert before making any decision.
What are the investment strategies during a recession?
Many Investors make the mistake of doing the wrong investment during recession. You may have some queries like how to invest during a recession? And where to invest during recession? Investment during global recession may not always be what you use to hear or think about. The best long term investment sometimes may offer higher returns in future.
After stocks fall, investors buy them at a low price and sell them out with high profits in future. But very few can practise this as fear of losing money plays a vital role during a Market downturn.
There are some kinds of recession proof investments that could be the best options for investing in a recession.
- Invest in defensive stocks: There are some stock sectors that make a similar profit during economic recession too. So, what stock sectors do well in a recession? And what are defensive stocks in a recession? Defensive stocks like the goods and services that people buy regardless of the state of the economy.
The consumer staples sectors are the largest defensive sectors. Investing in Utilities is recession proof investment as utilities like gas, and electricity companies do well during an economic slowdown.
Healthcare providers, insurers and pharmaceutical companies are a little bit more effective in a recession economic cycle. Defensive companies’ contracts are not related to the nation’s economy.
- Reliable Dividend: To start with are dividend stocks good during a recession? or what is good to invest in during a recession? First, we have to know about the dividends during recession.
Investing in dividend stocks in a recession can be a considerable way to generate passive income. High-dividend stocks are less volatile than other kinds of stocks. They offer a cash dividend that ensures you’re getting some income while you’re waiting for the market to turn.
- Real estate: real estate investing during recession can be a relevant investment for many reasons. Firstly start with what happens to real estate during recession? You may have it at a cheaper price than other times. When the economy gets stable and the value of your real estate may increase. Secondly, you may get a much better mortgage rate during period of recession than other times.
- High yield savings accounts: Cash savings in a savings account can be a good short-term investment since most recessions don’t last too long. If you lose your job or get your salary reduced during a recession, you can spend it based on your needs.
- Purchase precious metal investment: gold or silver perform well when market turndowns. But since the demand for these kinds of commodities often increases during recession, the price of gold during recession increases too.
You can invest in precious metals in many ways. You may buy coins or bars from a seller or coin dealer. While this is different from buying security, it’s technically better than any other option. You may also purchase digital gold as it’s the safest way to invest in gold.
- Bonds: Sovereign bonds are one of the best ways to park your money safely. Whenever possible, purchase AAA-rated sovereign bonds, which provide the best safety though they may offer slightly lower returns than A or BBB-rated bonds.
- Invest in yourself: If you lose your job and have gotten reduced your salary in recession period. you can invest that time to be admitted in some course to improve your skill and knowledge to establish yourself with better job opportunities.
Recession vs Stagflation:
Stagflation and recession are not the same. Here we are going to explain what is the difference between stagflation and recession. Stagflation is a period when economic growth is stagnant with high inflation and high unemployment.
On the other hand, a recession is a period when the economy gets smaller, conceded as two consecutive quarters of declining GDP. stagflation refers to a situation which is characterized by a slow-growth economy and a relatively high rise in Unemployment. However, a recession occurs when a nation’s GDP declines.
During the recession of 1970, stagflation was first introduced, When economies experienced quick high unemployment and inflation. At the time the economists couldn’t easily explain how stagflation could happen. Inflation hiked from 1% in mid-1960 to more than 14% in 1980.
Economists couldn’t clearly explain the reason for stagflation, though they commonly exemplify two factors such as price increase of widely used commodities and a high increase in the money supply.
Stagflation is rare, while Recession occurs periodically. Lengthy stagflation had occurred in the 1970s, but some relevant recessions which had occurred periodically are the 1948 recession, 1981 1982 recession, the 2008 global recession and the recent global recession 2021.
Stagflation can last for a long time and they are very not easy to abolish. A recession generally lasts for a minimum of 2 months to a maximum of 18 months. GDP growth reduces on average a year during stagflation but, in recession gdp growth shrinks.
The inflation ratio between stagflation and recession is that inflation becomes higher in stagflation and inflation tends to be down during a recession. a combination of recession and inflation is called stagflation. High unemployment is a defining feature of stagflation, on the other hand, high unemployment is an indicator of recession.
So, here we cover ‘What a recession means?, What would cause a recession? If you are too worried about thoughts like are we in a recession? Or what will happen if a recession arrives? Then came down, there is nothing much to worry about.
You just need to be very attentive about your spending and to be aware of taking unnecessary risks when a recession is about to prevail in the economy. a downturn in economic activity causes recession, hence you must be very careful with your financial planning during a recession. recession of an economy may be removed by the time of extremity of recession.
Disclaimer: I am not a certified financial adviser and this is not financial advice. The purpose of this article is to inform you about financial products and strategies. Consult your financial advisor before making any financial decisions.