Investing

What you can expect to happen during a typical economic recession

When economic activity declines, it could affect your job, your finances, and your portfolio.

It's official: In February, the U.S. economy fell into a recession after the longest economic expansion in history. Recessions are a normal part of the economic cycle, and yet they can feel anything but normal during one.

While many people on Wall Street had already deemed that the economic damage caused by the coronavirus would qualify as a recession, the organization tasked making the official call did so on June 8. The National Bureau of Economic Research (NBER) said that economic activity peaked in February.

The stock market had already dropped in anticipation of a recession, as the S&P 500 fell nearly 34% between February and March. At current levels, this benchmark is less than 5% below its all-time high. Meanwhile, a reliable predictor of recessions in the bond market has been flashing warning signs about a downturn.

For more than 65 million Americans between the ages of 15 and 29, this recession will likely be their first since entering the workforce. Luckily, some experts predict this downturn will be the shortest in history. Here's what to expect.

What a 'typical' recession looks like

A recession occurs when there's a significant decline in economic activity as consumers and businesses spend less money. Many economists define a recession as two consecutive quarters of declines in gross domestic product (GDP), which is the sum of the value of all goods and services produced in an economy.

Another widely recognized recession indicator is unemployment. When there's a rapid spike in unemployment compared to recent lows, "the economy is effectively always in a recession," according to research from The Brookings Institution.

In the past 100 years, there have been 17 recessions, each lasting anywhere from six months to about 3.5 years, according to figures from the National Bureau of Economic Research. That works out to a recession roughly every six years, meaning that it's been longer than average since the economy experienced such a slowdown.

Here's how past recessions stack up, in terms of their length and peak unemployment rate.

This economic downturn will likely look much different than the last one. The Great Recession was the worst, and longest lasting, since the Great Depression that began in 1929. And while it's difficult to predict how severe future recessions will be, it's also unrealistic to assume they will mimic past ones — especially because the causes can vary, as does the impact on various industries.

How a recession could affect your job

Nearly half of Americans live paycheck to paycheck, according to a recent survey conducted by GoBankingRates. So understandably, job security is a primary concern in a recession.

Here's how past recessions have affected workers:

  • The unemployment rate — or the percentage of the workforce that's jobless — increases because companies reduce headcount, and either slow or stop hiring. In fact, the unemployment rate has a perfect track record as a leading economic indicator for predicting recessions, which is why it's one of three signs professional investors watch closely.
  • Some companies reduce the number of hours that employees work to cut costs amid lower demand for their products or services.
  • The number of people working part-time increases, driven not by choice but rather because they can't find full-time work or their employer has cut back on hours.

Even when there's a downturn, there are ways to help recession-proof your career, according to experts, including: diversifying your skills, expanding your network, joining professional groups or associations, and looking for opportunities to transition to a different role or industry.

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How a recession could hit your wallet

If a recession does affect your job, your spending habits and other elements of your personal finances will likely change. Fear of a recession can also prompt people to cut back out of concern or uncertainty.

Some experts have warned that because people have been worrying about a recession , fear itself could fuel the downturn. Still, uncertainty is inherent to recessions.

That's why experts recommend planning ahead now to help you stay on track in the event the economy gets bumpy. To recession-proof your finances, it can help to take steps like building up a cash emergency fund, getting spending and debt under control, and diversifying your income by picking up a side hustle.

Like in past recessions, the Federal Reserve cut interest rates to try to stimulate economic growth by making it cheaper for consumers and businesses to borrow money. At the same time, that means you earn less interest on your savings account. As interest rates fall, check if it makes sense to refinance your debt, including mortgages, auto loans, and credit cards.

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How your portfolio could fare during a recession

Like the unemployment rate, many professional investors monitor the major stock indexes for signs we're entering a bear market as a possible recession indicator.

The 2010 decade was one of the best ever for investors, with the S&P 500 surging more than 300% since 2009. But just as the economy goes through cycles, so does the stock market. In a bear market, major indexes like the S&P 500 — the benchmark for the U.S. stock market — fall more than 20% from a recent high.

The last bear market coincided with the Great Recession, and the S&P 500 fell 57% between October 2007 and March 2009. But that's not always the case; in fact, there have been 13 bear markets in the S&P 500 since 1945, and only eight of them overlapped with some part of a recession.

The stock market also entered a bear market earlier this year, which caused the value of your portfolio to slump. Many investors flock to bonds during periods of economic uncertainty because these assets offer lower risks and more predictable returns — but bonds are a smart investment to have in your portfolio at any time. Work with a financial advisor or follow popular guidelines based on your age to figure out the right asset mix.

While recessions can be scary, it's important to not let fear completely sidetrack your career or financial decisions. Americans are likely to live through a handful of recessions during their lifetime, and these downturns can actually be a good opportunity for young investors to buy stocks at lower prices.

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