Financial Terms Everyone Should Know – Recession

Recessions tend to draw a lot of news coverage, but just what is a recession?  Investopedia defines recession as a significant, widespread, and prolonged downturn in economic activity. It is just one part of the ever-changing economic cycle, made up of expansion, peak, contraction, and recovery. There is no hard or widely agreed upon definition for a recession but it is usually accompanied by declining consumer demand which leads to layoffs, which lead to less consumer spending power which can further weaken consumer demand. Recessions also tend to reflect in the stock market with declining stock prices, affecting investors and those with retirement accounts in stocks, bonds, and mutual funds. At this point, governments can use fiscal and monetary policy to stimulate the economy by putting money back into the consumer’s pocket through unemployment insurance and other stimulus payments. According to the National Bureau of Economic Research, the average U.S. recession since 1945 lasts about 10 months.

The best way to prepare for a recession is to be debt free and have an emergency fund. When you have no debt and a fully funded emergency fund, you are prepared to survive a recession, expansion, peak, or contraction and can take advantage of any opportunity that comes along, regardless of the cycle.

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