Tips to spot a recession (and why we’re not there yet)
LINDSEY BELL • June 29, 2022 • 3 min read
Everyone is talking about it. It’s in every newspaper and all over social media. So it’s no wonder a recession feels like a foregone conclusion. But first, let’s all take a deep breath!
Let’s level set before we go down the recession rabbit hole. A historical perspective can help. Economic growth, or gross domestic product (GDP), was 5.5% in Q4. That’s a big number (and the fastest rate since 1984). For context, growth averaged 1.4% between 2009 and 2020. It’s natural to see things cool off a bit after a big run and understandable that many see it as a potential recession precursor.
The term recession is often used very casually, even though it’s anything but. The textbook definition is: a contraction or significant decline in the economy that lasts for more than a few months. To further complicate things, a recession isn’t officially declared until after the fact, usually several months into the downturn.
The actual question we should be asking right now is how big of a slowdown should we expect? Without a crystal ball, that’s hard to say. But here’s what you need to know to navigate.
Why it matters:
So, how are you supposed to prepare for something you may not know is here until after it’s arrived? There are two key indicators to keep a pulse on: unemployment and income.
As we head into a recession, the unemployment rate usually increases and incomes start to decline. These factors are important because the largest component of economic growth is consumer spending, and with less money, we can’t spend what we used to, impacting growth.
But here’s what you need to know now: Neither of those things has happened yet.
What it means for you:
It’s natural to be nervous when the prices of gas and food and a lot of other things are taking a bite out of your wallet. But try to remain calm. Recessions can become self-fulfilling prophecies. If we think a recession is coming or we think our job prospects are in danger, we pull back on our spending. And remember, consumer spending makes up the lion’s share of economic growth.
While job prospects and employment opportunities play a big role in the path forward, so can we. The job market is still running hot right now, so if we can protect (or improve) our income, in a way, we can help curb the economy from tipping into a recession.
This might sound hard with the current rate of inflation. There is a real need to adjust our spending to help offset some of the higher prices we are enduring. Revisiting your budget is a good idea – but don’t let paranoia take over at this point. Nothing is for certain but stay the course and control what you can control in the near term as we navigate the economy together.
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Lindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.