A lot of people are talking about a coming recession. Economic signals are pointing to a possibility a recession could hit the world in 2020, but no one is certain. You will be hearing a lot more about this in the coming months.
What, exactly is a recession? In pure economic terms it is a period, often a year or more, when economic activity slows down and decreases, contracting the economy into a smaller pie. The result of this contraction is usually less money flowing through the economy, higher unemployment and lower stock prices.
The past ten years have been a period of economic expansion, where the Gross Domestic Product, or GDP, has risen by 2-3% every year. The benefits of this growth have not been felt equally around the world, but the vast majority of people have seen at least some improvement in their situations.
Depending on how long and how deep the next recession is, that's about to change big-time. Pillars of our economy start to weaken during a recession- employers cut staff, bankruptcies increase, governments tighten their belts, and retirement accounts, homes, and almost anything of value except gold goes down.
No one knows for sure why recessions happen, but they've been occurring fairly consistently for the last century. Our economy has been growing steadily for nearly 10 years and is almost at a record for continuous growth, so some think we are overdue. The reasons are more complex than that, but in my view there is a strong economic need for occasional breathers to clean out the crazier ideas that emerge when times are good. Many of the rules, regulations and safeguards that we take for granted today arose because recessions exposed bad actors and bad policies.
Many don't realize that recessions are a global phenomenon. Because the world economy is so interwoven, it's typical for downturns in one region to effect others far away. Europe and China are already experiencing economic slowdowns. Though it may be tempting to blame a recession on one person or one company, it's rarely that simple.
Luckily, since we have a lot of previous experience with recessions, there are things that can be done in anticipation of the next one, whenever it hits. Those things are even more important to consider as we head towards the end of 2019.
1- Don't panic. Many bad decisions can happen in the throws of a recession. No matter how far things go down, they will eventually come back up. Selling all of your investments is never a good ideas when things are headed downward. If you can afford it, recessions are a great time to buy assets after they drop in price. If you plan on staying in the stock or home market, be prepared to ride out a rough patch and try to avoid thinking about your statements and 401k losses.
2- Take care of your mental and physical health, and that of your friends and loved ones. Stress is a byproduct of recessions, and the suicide and drug abuse rate inevitably rise during dark times. But mental health doesn't have to rely on the economy- only you can take the right steps to stay on an even keel. Make sure to exercise, sleep well, eat healthy, socialize, and meditate or pray to help your body, mind and soul.
3- Stay informed, but be vigilant. The media, economists, and politicians will all be blaming a lot of different things during a recession, some of which are valid and many of which are not. The goal during a recession is to learn and grow, so use all the information that will be thrown your way to get better at understanding money. As business activity slows down, you may have more time on your hands, so make use if it by learning more and becoming more.
4- Have a plan B. And C. And more if you need them. If we know anything about the times that we live in, it's that things can change rapidly. Recessions supercharge change. Companies can go out of business, governments may pass new laws, or entire industries and towns can be wiped out. Almost any job or source of income can be a target during a recession. Think now about what your next step would be if you lost your job. Save up an emergency fund if you can.
5- Be careful with your spending, but not too careful. One odd consequence of recessions is that behavior that is responsible cuts in household spending actually can make things worse. Less spending means less income for businesses, which has a ripple effect to make everyone poorer. Now is not the time to horde your money. It's very likely that fiscal stimuli will be proposed to help you spend more. Act responsibly and keep debts down to what makes sense for you.
I, along with many others, will be watching this story carefully the next few years. Come back here for updates.