Question: What is a Recession?
Answer: A recession is when GDP growth slows, businesses stop expanding, employment falls, unemployment rises, and housing prices decline. For those reasons, many experts say the U.S. is actually in a recession now:GDP is slowing,Businesses are expanding more slowly,Employment is falling,Housing prices are down 10%.
Many experts state that it is only an economic recession when GDP growth is negative for two consecutive quarters or more. However, for all practical purposes a recession starts when there are several quarters of slowing but still positive growth. Often a quarter of negative growth will occur, following by positive growth for several quarters, and then another quarter of negative growth.
A good example was the stock market crash and subsequent economic downturn in 2000. This was not a recession in technical terms because GDP growth was negative in Q3 2000, Q1 2001, and Q3 2001, none of which were consecutive. However, anyone who lived through it knows that it felt like a recession during all that time. And in fact, GDP growth did not reach over 3% until Q3 2003.
About the only good thing about a recession is that it will cure inflation. The balancing act the Federal Reserve must pursue is to slow economic growth enough to prevent inflation without triggering a recession. Currently, it must do this without the help of fiscal policy, which is generally trying to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring current account deficits.
How Would a Recession Affect Me?
In a recession, economic growth falls dramatically. The stock market declines, and usually enters a bear market. This usually causes a “flight to safety”, where investors buy Treasury Bonds, which causes interest rates to fall. Employers reduce new hiring, and eventually start laying off workers.To revive the economy, the Federal Reserve usually starts lowering interest rates to spur business lending and investment. The Federal Government may institute tax breaks to spur consumer spending.
The current economic slowdown was started by a housing market decline which itself was initiated by the Subprime Mortgage Crisis. This decline also means that existing home values have fallen by 10%. In a recession, prices could fall another 5-10%.How It Affects YouYou have probably already felt the impact on your home’s value, and therefore your home equity. This reduces your wealth. You will continue to feel the impact on your retirement savings, as stock prices decline, further reducing your wealth.The greatest risk is if you are in an industry that has layoffs, and you lose your job. If you aren’t laid off, then you will probably be asked to work longer hours to compensate for the new employees who aren’t hired.
As the recession continues, you may benefit from lower interest rates and tax cuts, which are applied to everyone. Normally, this would help you refinance or get a better mortgage. However, lenders have become more stringent about credit standards, so you won’t benefit unless you have great credit scores.