A Practical Definition Of A Recession To Help You Prepare For A Recession
No one can truly, or should I say consistently, predict when a recession will occur. If recessions were predictable their impact on the economy could be easily mitigated. There are indicators that allude to the possibility of a recession. But, each recession that has occurred throughout history has had slightly different root causes. The impact of a recession is undeniable. But, how hard a recession will impact the economy is not predictable. How far and wide a recession will stretch is not predictable.
So, how do you prepare for a recession when you cannot predict when a recession will occur? How do you prepare for a recession when you cannot predict its full impact on the economy? How do you prepare for a recession if you do not know if it will affect you.
The easy answer is that you should always be prepared for a recession. You should always be prepared to make the tough financial decisions that may be necessary to survive a recession. But, living in a financial bubble, always in fear of a recession is unrealistic and frankly is not a good way to live. We already have too many life stresses, to always be worried about a recession. How, do you avoid being in that financial bubble worrying about a recession and the bad economic times they bring. You have to understand what a recession is. Once you understand what a recession is and why they occur you can at least partially prepare for a recession by placing yourself in a more stable financial position. If you live beyond your financial means then preparing for a recession may be beyond your financial capabilities. But, if you live within your financial means you are already on the right path to easily prepare for a recession. Live within your means and you are more prepared for a recession than most people.
What is a recession? What are the signs that a recession may be coming? First things first. You need to realize that recessions are not just national in nature. One state could be in a recession while the rest of the country prospers. For instance, Florida could be in a recession, caused by huge losses in the vacation industry caused by hurricanes, while the rest of the country prospers. Another example could by Florida being in a recession due to crop damage from a colder than normal winter, but the rest of the United State is unaffected.
Generally speaking, a country, state, county, city, and even a local community, can all be described as being in a recession while their counter parts in different geographic locations cannot be described as being in a recession. I guess that I want you to realize that recessions are not solely national occurrences. On the other hand, we don’t normally react to a recession unless it is national in nature.
The official description of a recession is the reduction in gross domestic product (GDP) for two consecutive quarters. The official start of an economic recession is declared by the National Bureau of Economic Research (NBER). The NBER can take a long time to make its official declaration that the economy is in a recession. The economy could have been in recession for months before the NBER makes an official declaration.
So, what the heck does “reduction in gross domestic product (GDP) for two consecutive quarters” actually mean to you and me? Nothing. I do not mean that they are wrong. Because they are not. But, as far as what it means to you and me, that definition is utterly meaningless, worthless. First, you will have been in a recession for a minimum of six months before they will even consider declaring an economic recession. And that does not include the amount of time that it will take for the NEBR to crunch the numbers and make an official notification that the economy is in a recession. It is much harder to prepare for a recession when you are already in a recession.
So, for our purposes this definition is virtually meaningless. So, what would a practical definition be for the beginning of a recession. For the purposes of preparing for a recession, or the implementation of a predetermined recession survival plan; your plan for surviving a recession, I would describe the beginning of a recession as follows. Watch out for anything that could have a significant impact on the economy. Look out for things that would shock the economy. Exorbitantly high oil prices, natural disasters like Katrina in New Orleans, over heated markets, like the real estate market in 2005 and 2006, collapse of an industry or company that has a significant impact on the country or region; for example the steel industry in the eighties, the auto industry in 2007, and of course war.
You do not need to know for sure that the economy is going into a recession before you start to prepare for it. Signs of an economic recession can be around for a significant period of time before a recession actually occurs. But, by recognizing these signs you can prepare for a recession while you still have time. There is no way to read the economic tea leaves to predict a recession. But, don’t ignore the economic writing on the wall before you start to prepare for a recession and put your plan for surviving a recession into action.
So, what if you put your plan for surviving a recession into action and a recession does not occur or it is only a minor recession only lasts a few months? Obviously, the steps you would take in the beginning is cut discretionary spending and increase your emergency funds. So, implementing your recession survival plan has just put you into a stronger financial position. It is a win win out come, even if a full blown recession does not materialize.
Knowing what a recession is, preparing for a recession and surviving a recession all go hand in hand. If you understand that over heated markets, the housing market, or industries like the auto industry, or other factors could indicate a recession may be on the horizon you can prepare for a recession in an intelligent manner that will make your financial position stronger, even if a recession does not occur. Knowing when to prepare for a recession will make surviving a recession much easier, and who knows you may be able to take advantage of opportunities that arise from a recession and even prosper in a recession.
