The idea of a recession seems to have become a word that brings with it feeling of dread and even fear. It’s even easy to see why, to a certain extent. After all, with a recession comes job loss, stock market crashes, high inflation, and all sorts of economic turmoil. However, as bad as recessions may be, there are always signs of a recession that can help you identify it earlier on.
If you’re able to identify a recession earlier in it’s lifespan, then you can take steps to help mitigate your losses during a recession. In fact, it’s even possible to come out of a recession stronger than before!
What Exactly Is A Recession?
Defining a recession can be hard, and noticing one can be harder – particularly if you’re in the beginning stages of one. To put it simply, there are ups and downs in the economy over time. For quite a while we were having record highs in the stock market and our economy, following by a rapid crash and slow build back up. Those major dips in our economy’s performance can be a great indicator of a recession, and if they’re bad enough they may be indicative of a depression. However you want to look at it the fact is this, a recession is a low period in our economic prosperity and stability.
In a recession there is often a drop in the value of your currency, for multiple reasons. Trade may be hurting, the housing market may be in shambles, and production and manufacturing could be at a standstill. Consequently, this can also cause a shortage of jobs, as companies can no longer afford to hire as many workers as they previously could. Obviously, if that happens to you, it can cause major problems for your household. That’s why it’s best to always be prepared for a recession – to avoid or at least soften the blow of any sort of financial catastrophe.
1. GDP Issues
GDP stands for gross domestic product. It’s the metric we use for a country’s economic output. In other words, it is the measurement of the market value of all goods and services produced within the country. When GDP experiences a downturn, that often indicates an economic downturn, and at times that could even become a recession. A common rule of thumb, which you’ve probably heard, is that two consecutive quarters of decline in GDP means a country is in a recession.
Lately, there have been arguments of whether 2 quarters of GDP decline actually constitute a recession. Regardless of the politics, or how some people try to move the goalpost, 2 quarters of GDP declines remains a good indicator.
2. The Sahm Rule
The Sahm Rule, named after former Federal Reserve and Council of Economic Advisors economist Claudia Sahm, is a newer method to identify a recession. Under this rule, a recession is identified when, “The three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months.”
For those of you with less of a background in finance or economics, you only need to take away a few things from this.
- The Sahm Rule indicates a recession after 3 months, based on the national unemployment rate.
- Compared to other indicators of a recession, this rule is relatively simple and identifies recessions earlier than many other methods.
- Overall, it is a surprisingly accurate way to identify a recession.
3. Lower Production
Usually, when a recession occurs, manufacturing and production are lowered. Now, the causal relationship between recessions and production varies. For example, sometimes production is lowered because of financial struggles companies are facing because of the recession. Other times, because production is forced to stop, it can help contribute to the start of a new recession.
Either way, this isn’t a perfect indicator, but it’s a useful trend. Keep an eye out for it, as it could help you identify a recession!
4. Less Household Spending
Obviously, when recessions occur there will be less household spending – at least on discretionary or “fun” expenses. While grocery expenses may skyrocket, what people spend on games or luxuries may change. When you notice a steep decline in household spending, make a note of it. It could be an accurate sign of a looming recession.
5. High Inflation
Another great indicator of a recession is extremely high inflation. Some inflation isn’t innately bad – in fact, it can be good and a sign of economic growth. However, when you notice record-breaking inflation rates, then that may be a sign of a recession.
6. The Volatility Index
The VIX or Volatility Index is a useful tool that can help investors measure market risk based on factors like fear and stress. It was created by the Chicago Board of Options Exchange (CBOE). The Volatility Index is based on measurements of the S&P 500. When the VIX is high, that indicates a drop in S&P 500 prices.
As a general rule of thumb, when the Volatility Index is greater than 30, that means there is more volatility than normal in the market. On the opposite side, when the Volatility Index is below 20, that means there is less volatility in the market. In other words, when it’s under 20 then the market is more stable. When it’s above 30, it’s less stable.
Conclusion
There we have it – 6 signs to help you identify a recession. Remember, the biggest issues when it comes to recessions comes from not taking the steps to prepare yourself properly or from being ignorant of the situation and driving yourself into a panic. Relax, focus on what you can control, and you’ll be able to mitigate a lot of damage to your personal finances. I hope you learned a lot from this article. If you have any other tips to add, or had an experience to share, be sure to leave a comment.
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