What Is a Recession and How Might It Affect You?

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What we’ll cover:

  • A recession is a period where you see a significant slowdown in national economic activity over the course of several months
  • People may experience job loss or reduced income during a recession, which can affect the ability to pay bills and reach financial goals
  • The timing and duration of a recession are out of our control, but there are steps we could take to financially prepare ourselves for one

If you’ve ever taken an introductory course in economics, you may remember a recession being defined in terms of “two consecutive quarters of decline in real GDP.” 

Let’s put that into plain English though. We don’t want you nodding off at the start of this article. 

A recession is a period where you see a significant slowdown in national economic activity over the course of several months. It’s a time when consumers and businesses typically try to cut spending and costs in response to the economic uncertainty. In a recession, you tend to see a spike in unemployment, stock market losses, distress in various business sectors and falling interest rates.

Recessions are generally hard to predict, and a lot of times you may not even know you’re in one until you start to see its impacts: declines in personal income, employment numbers, industrial production and wholesale retail sales volume. These are some of the key economic indicators that can give us clues as to whether a recession is on the way. While many may try to forecast recessions using these indicators, it is the National Bureau of Economic Research (NBER), a nonprofit economic research organization, that officially tracks and declares recessions in the US. NBER’s Business Cycle Dating Committee is the body that determines the official and start and end dates of US recessions. 

It’s also hard to say how long a recession will last. They may be relatively short: The 1980 recession lasted six months. Or they could be more prolonged: The 2008 financial crisis lasted 18 months. 

No two recessions are ever the same – the duration and scope of economic effects can vary. Whatever the trigger may be, a recession can affect us all in some way.

How might a recession affect your job?

When economic activity drops significantly during a recession, many people could see smaller paychecks (due to reduced work hours) or even lose their jobs. That’s because companies typically try to cut costs when business slows down. 

Economists pay close attention to the unemployment rate when trying to determine whether we’re in a recession. Growing unemployment is often a result of economic trouble and can signal further challenges ahead. 

Widespread layoffs have been one of the most immediate and devastating effects of the coronavirus pandemic. In April 2020, the US unemployment rate reached 14.7% - nearly 21 million jobs were lost in a month.

How might a recession affect your ability to pay bills?

As people bring home less money or lose their income, bills such as credit card payments and mortgages may start to pile up, putting people under enormous financial stress. Some may lose their homes, cars or other assets when they can’t pay on time. And others may have to take on more debt to pay for essentials. 

In the face of these challenges, people are likely shopping and eating out less. This may help save money, but the drop in consumer spending can hurt businesses, leading them to cut even more hours or jobs. It’s a vicious cycle that can exacerbate the magnitude of widespread economic troubles.  

We know this is a pretty bleak picture, but this is why recessions can inspire so much dread and fear.  

If you’ve lost your job due to the coronavirus and are experiencing financial hardship, this is probably the time to crack open that emergency fund you’ve worked so hard to build. If your emergency fund is not where it needs to be or you don’t have one – don’t worry, you may have other options.

How might a recession affect your ability to save for retirement?

Saving for retirement takes patience and discipline even during the best of times. This can become a real challenge in times of uncertainty. First, if you’ve lost your job because of a recession, retirement savings is probably the last thing on your mind as you need to focus on covering essential living expenses. 

People who still have jobs during a recession can probably afford to continue contributing to their retirement savings. But they may be tempted to reduce or suspend their contributions in the face of economic uncertainty. The market volatility and stock losses that usually come with a recession aren’t exactly confidence boosters. 

You may wonder (and understandably so) what’s the point of contributing when the account seems to be bleeding money and decide to stop altogether until the economy recovers. This is how tough economic times can knock people off course when it comes to their financial goals. Uncertainty can generate fear and doubt that can lead to poor financial decision-making.

Is there anything I can do to protect my finances during a recession?

Look, it’s hard to read (and write) about the effects of a recession without feeling some anxiety. 

But there are some steps you could consider taking to financially prepare yourself for a recession. These include boosting your emergency fund, reworking your budget and paying off high-interest debt. Having certain financial preparations in place can make a difference in how well you weather the next economic storm. 

And hey, hard times don’t last forever, and neither do recessions. Historically, just as there have been economic downturns, there have also been recoveries and expansions.

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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.