By Danielle Arlotta, CFP®
In recent news, you’ve likely heard the word “recession” being mentioned more frequently, especially as economic indicators fluctuate. But what exactly does a recession mean, and how does it impact our daily lives?
What is a recession?
The National Bureau of Economic Research makes the call about the U.S. being in a recession, though there is no set rule for calling a recession. “The NBER’s traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
You’ve probably heard that a recession is two consecutive quarters of negative GDP growth. This is not the only factor that is used to call a recession though. NBER, is also looking at employment, income, production, and consumption.
After looking at the above factors NBER also looks at depth, diffusion, and duration to call a recession. Depth, how bad is the decline? Diffusion, how far has this spread? Duration, how long has this lasted?
What Causes a Recession?
Several factors can trigger a recession, often working together. Some common causes are:
- Decline in Consumer Spending
- Higher Interest Rates
- Global Events or Crises
- Decreased Business Investment
- Stock Market Declines
How Does a Recession Impact Your Finances?
- Job Losses and Unemployment: Companies may cut back on hiring, freeze wages, or even lay off employees to save costs. This may also lead to bonus cuts, reduction in hours, and lower raises.
- Stock Market Volatility: During a recession, stock markets tend to be more volatile, which can cause your investments to lose value. However, for long-term investors, these market dips may present buying opportunities.
- Increased Cost of Living: A recession may lead to inflation, as a result, the cost of everyday items such as food, gas, and housing usually rises.
- Increased Interest Rates: If you already have outstanding debts, the interest rates on variable-rate loans, such as credit cards, may increase, making it more difficult to keep up with payments.