Are we in a recession? Plus, how to prepare your finances

We’ve been crying over the cost of gas and eggs for weeks (months) (years) (our entire adult lives) now thanks to inflation. Another fear has been looming: a recession.Let’s break down what exactly a recession is and how it can actually impact you.

What is a recession?

A recession is often defined as two quarters in a row of decline in a country’s gross domestic product. But, that’s not the whole picture. According to the National Bureau of Economic Research, a recession is the period between a peak of economic activity and its lowest point. The decline in economic activity must be significant, spread across the economy and last more than a few months: depth, diffusion and duration.

The NBER looks at several factors, including GDP, consumer spending, wholesale-retail sales, industrial production, real personal income and two Department of Labor monthly surveys.

What causes a recession?

There are four typical factors.

• Decreased consumer spending.

• Increased business costs.

• Reduced lending.

• Stock market declines.

Are we in a recession?

No. The last official recession documented by the NBER’s Business Cycle Dating Committee (which maintains a chronology of U.S. economic activity) occurred from February to April 2020. That means that the peak in economic activity happened in February, followed by the trough in April.

And it takes time for the committee to decide. The decision on the 2020 recession (the shortest one on record) was issued in July 2021.

In good economic news, the unemployment rate fell to 3.4% and employers added 517,000 jobs in January, according to the Bureau of Labor Statistics. But we’re still dealing with inflation, layoffs in certain industries and a struggling housing market.

What’s the difference between a recession and inflation?

First, let’s define these terms. We know that a recession is an extended economic downturn.

Inflation measures the price increases of goods and services over a period of time, according to the International Monetary Fund. The most widely used method of measuring inflation, according to the Bureau of Labor Statistics, is the Consumer Price Index. This measures the average change over time in how much we pay for goods and services.

“A potential recession would negatively affect unemployment significantly. Losing a job is never good, but when you combine it with such high inflation it can really become disastrous,” said Jill Gonzalez, a WalletHub analyst, in a news release. “Even Americans with jobs right now are struggling to afford essentials like food and gas. If those numbers would climb while more people become unemployed, we might see an economy in deep recession.”

The Federal Reserve (the central banking system of the U.S.) has been trying to manage inflation by hiking interest rates. On Feb. 1, the Fed hiked interest rates by a quarter of a percentage point. It was the eighth consecutive hike. Inflation has been easing up for the last six months. But the Fed is trying to get rid of price increases throughout the economy.

High inflation can be a sign of a looming recession. And rate hikes from the Fed could trigger a recession.

What should I do to prepare for a possible recession?

First, take a breath. Yes, the current economic climate can be stressful, but panicking over it won’t help.

These environments come with heightened financial risks. You might want to avoid taking on new debt. You should also be aware of potential layoffs in your industry as it can be difficult to find a new job in a recession.

Co-signing for a friend or family member or taking out an adjustable-rate mortgage also bring additional risks in a recession.

You should especially be cautious with your investments. Don’t panic over your 401(k) or stock portfolio. You haven’t actually lost money until you sell; selling at a loss locks in the loss and these are long-term investments.

You should go over your budget and see where you can cut back in discretionary categories. Leading up to a recession it’s also important to build your emergency fund; experts generally recommend three to six months of expenses.

This story was originally published February 21, 2023 at 9:51 AM with the headline "Are we in a recession? Plus, how to prepare your finances."