So it seems we are pretty much in a recession now. So much is going on that I am not sure how to keep up with the news. It seems there is always something bad around the corner.
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In today’s post I will be exploring what a recession is, how long they typically last and why I think this is a great buying opportunity for long term investors.
What is a Recession?
A recession is when an economy enters into a period of economic decline. In other words, the economy goes through a downturn. A recession can also occur if the government decides to cut spending or raise taxes too high.
In fact, there are many factors which can cause a recession but the general concept is most of the economy seems to be going down. GDP usually goes down and asset values usually tank as well.
How do economists determine we’re in a recession?
Economists use a number of different metrics to measure the health of the economy, including gross domestic product (GDP), inflation, employment, consumer confidence, housing prices and interest rates. They also look at how consumers spend money, what companies are producing, and how many jobs are being added or lost. All of those things help determine whether or not the economy is growing or shrinking.
The National Bureau of Economic Research (NBER) defines recessions as “a significant decline in aggregate demand.” This typically happens when people start saving less because they don’t feel confident about the future. In turn, businesses stop investing in new equipment and hiring workers. As a result, the overall level of production declines over several months.
A recession usually lasts around 10–17 months, although it can sometimes take longer. During that period, the economy tends to shrink, and job losses increase. However, the NBER doesn’t define a depression, which is defined as a prolonged downturn lasting more than six months.
How long is the average recession?
Recessions last an average of around 10–17 months according to the National Bureau of Economic Research (NBER). But some recessions are shorter or even longer than that. In fact, there have been several recessions since World War II that lasted less than 10 months. And there have been others that lasted longer than 17 months.
The length of a recession depends on how severe it is. When the economy slows down, people spend less money on products and services. This causes businesses to cut back on hiring and spending on capital improvements. Eventually, fewer jobs become available. People lose confidence in the future and start saving more. Businesses stop investing because they don’t know whether demand for their goods and services will pick up again. All of these factors cause the economy to slow down.
In general, recessions tend to end when consumers begin buying again. Consumers feel confident enough to spend money. They start spending more freely, and businesses start hiring again. As a result, the economy starts growing again.
Taking a look at the S&P500 you can see that the market seemed to peak right around the beginning of the year. If you use this as the starting point for the recession, then that would put the end of the recession somewhere between October 2022 and May 2023.
Although this can’t be used to accurately predict when the end will come. Many people believe the recession is only just starting which would push those dates back by roughly 11 months.
How could a recession affect me?
A recession will cause hardship for most people. But it won’t just hit the rich. It’ll hurt everyone. And while there are three main ways in how a recession affects us all, one way in particular stands out: inequality.
In a recession, jobs disappear faster than they’re replaced. So fewer people end up working. Which means less money coming into our economy. Less money coming into our economies means lower wages for everyone. Lower wages mean people spend less money. People don’t buy what they used to buy. Businesses stop buying things because they don’t think people are spending enough money. This causes businesses to lay off workers. More layoffs lead to even less income.
And since we’ve already seen some job losses, companies aren’t hiring as much either. Companies want to make sure they’re getting good employees. They want to make sure they pay fair wages. If they know there’s no demand for their products, they might offer lower wages. Or they might decide to cut costs somewhere else. Either way, it leads to even less income. And that means fewer people work.
The cycle repeats itself over and over again. Recessions happen every few years. We go through cycles like this about once every decade. And each time, we see the same thing play out.
Summary
A recession happens when an economic downturn lasts longer than expected. A recession usually starts with a decline in consumer confidence. That leads to a drop in sales. And then businesses start laying off workers. When businesses have to let workers go, they often cut back on purchases. And so, consumers feel worse off.
It is impossible to say exactly when a recession will end however estimates can be made (which are no greater then guesses). History has shown that most recessions often end up with the economy eventually growing higher than the highs before the recession so don’t expect the recession to last forever.
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