What Happens in a Recession? And Proactive Steps to Navigate One

Key takeaways

A recession is a widespread decline in economic activity that lasts for multiple months.

• The severity and length of a recession can range, often lasting anywhere from two months to a year and a half, with the average recession lasting approximately 17 months [1].

• The National Bureau of Economic Research examines a multitude of factors and data, including industrial production, consumer and business spending, income, and the labor market, to determine whether the economy is in a recession [2].

• You can prepare for a recession in several different ways, including by developing or strengthening in-demand skills.

Explore what happens in a recession and how you can prepare for a potential economic downturn. Afterward, build a high-income skill like AI with the Google AI Professional Certificate, where you'll learn o give AI clear instructions so it acts as a professional collaborator, not just a simple task completer.

What happens in a recession?

A recession is a major decline in economic activity that lasts for at least several months. The severity and length of a recession can range, often lasting anywhere from two months to a year and a half [1].

In order to identify whether or not the US economy is in a recession, the National Bureau of Economic Research (NBER) examines numerous factors and data points, such as industrial production, consumer and business spending, income, and the labor market [2].

Properly examining this data can take time, as data and details typically become available at varying times. As a result, the National Bureau of Economic Research is often only able to officially designate or announce the current state of the economy as being in a recession after it has already started.

What happens to stocks in a recession? 

The stock market can also suffer due to the effects of a recession. The market can become highly volatile, dropping significantly. It is especially prone to occur in the early stages of a recession. 

Certain industries, such as those selling consumer necessities, are more likely to successfully limit the damage of a recession. However, not all recessions are the same. With numerous factors, such as lower consumer spending causing lower profits for businesses, potentially impacting stock prices, it is challenging to predict the performance of stocks during a recession. 

What happens to interest rates in a recession?

During a recession, interest rates are likely to decline. For example, the Federal Open Market Committee within the Federal Reserve lowered the target interest rate from 4.5 percent in 2007 to just 2 percent by September 2008 [3]. 

Low interest rates can boost the economy through increased spending, and the ability to borrow money at a lower rate can make it more affordable for individuals and businesses to take out loans. Some people choose to use low interest rates as an opportunity to make a big purchase, such as buying a house. As a result, inflation can then rise in response to the increased spending. 

What are the key indicators of a recession in the US?

When a recession hits, various aspects of the economy are negatively impacted. Below are some common indicators that occur during a recession, which allow experts to determine whether or not a recession has hit.

What does a recession do to the average person?

During a recession, you may experience job loss, lower wages, and fewer growth opportunities. Losing your job can also mean losing benefits like health insurance and retirement savings. While this extreme will not happen to everyone, it is a time of financial strain.

1. GDP

Gross domestic product (GDP) measures the production value of goods and services throughout a country, as well as the income gained as a result of this production over a period of time, in some cases. To calculate GDP, you would consider factors such as consumption by citizens, investments, government spending, and exports minus imports. During a recession, GDP can fall anywhere from 2 to 5 percent, in more extreme cases. For example, the GDP during the Great Recession of 2007 to 2009 fell 4.3 percent [4].

2. Unemployment

As spending slows during a recession, companies will need to look for ways to cut costs, often resulting in layoffs and a reduction in hiring. It can become a cyclical process since people who experience layoffs will typically spend less money, causing businesses to take further losses. Unfortunately, unemployment can take a long time to recover from, and its lasting effects can linger into the recovery period following a recession. For example, during the 2020 recession, unemployment increased drastically from 3.6 percent to 13 percent in the initial wake of the COVID-19 pandemic [5].

Learn more: 10 Recession-Proof Job Fields

4. Income inequality

Not everyone suffers the same during a recession. Prior to the COVID-19 pandemic, in 2019, upper-income households had 58 times as much wealth as lower-income households. However, the wealth of lower-income households grew by 101 percent during the pandemic, compared with 15 percent for upper-income households [6]. 

5. Manufacturing activity

Manufacturing tends to suffer as a result of recessions, often due to an increase in production costs and shortages in supply and labor. The fact that consumers limit spending during recessions only worsens the impact of a recessionary economy on manufacturing. Downturns in manufacturing will also be reflected in the lowering of GDP. 

However, one positive note about the manufacturing industry is that it will usually recover faster after the initial decrease than other parts of the economy. In this case, an upswing in manufacturing can be a potential sign that the recession may be ending.

6. Retail sales

During a recession, many retailers have to employ cost-saving measures to mitigate the losses caused by reduced sales. These cost-saving measures can include layoffs, suspended hiring efforts, limited raises, and lower overall spending. 

Surviving a reduction in sales during a recession can be especially challenging for small businesses that don’t have the same ability to apply cost-cutting measures. During the 2020 recession, retailers implemented strategies such as online ordering and curbside delivery to make shopping easier for consumers. 

Proactive steps to navigate a recession

When the economy slows down, your goal is to minimize fixed costs while maximizing income streams and skills development. Let's review different ways you can navigate a recession.

1. Review your budget.

Go beyond tracking your spending and really audit it. This means categorizing your expenses into essentials (like rent, utilities, and grocerties) and discretionary spending (dining out, hobbies, and streaming services).

• Action: Identify the bare-minimum amount you would need to survive if your income dropped or disappeared. Knowing this number reduces anxiety and provides a clear plan of attack.

2. Build savings safety net.

While the standard financial advice calls for anywhere from 3-6 months of savings to cover a gap in income, a recession typically requires more padding.

• Action: If possible save at least six months to cover the bare-minimum expenses you identified above, but ideally more. Look into financial vehicles like a high-yield savings account (HSA) so your money earns additional, passive income.

3. Diversify your income streams.

Relying on a single job (aka a single paycheck) can be high-risk during an economic contraction.

• Action: Inventory your skill set and consider pursuing a side hustle, such as opening a marketplace on Etsy or offering your IT skills on a consultant basis. If possible, aim to generate a secondary income stream that covers around ten percent of your monthly essentials.

4. Strengthen your skill set.

Building and strengthening skills, especially those that are in-demand and linked with high-paying opportunities, is an excellent way to investment in yourself during a recession.

.

• Action: Focus on upskilling in areas more resistant to recessions.

Explore free resources to build your financial literacy

If you’re interested in building financial literacy, subscribe to our LinkedIn newsletter, Career Chat, to learn more about trending topics in finance. Or, explore free digital resources to guide you.

• Hear from an expert: 8 Questions with an Expert: Google Financial Data Analyst

• Build a budget: Google Sheets Dynamic Charts: How to Build Visuals That Update Automatically

• Watch on YouTube: Financial Markets with Robert Shiller by Yale University

Whether you want to develop a new skill, get comfortable with an in-demand technology, or advance your abilities, keep growing with a Coursera Plus subscription. You’ll get access to over 10,000 flexible courses. 

Build job-ready skills with Coursera Plus

Start 7-day free trial

• 
• 
• 
• 

Start 7-day free trial