Recessions are a major talking point, with experts speculating that we may be in a recession already. It brings up a lot of questions about what people and businesses can expect in a recession and how they can best prepare for it.
What Is a Recession?
A recession is a significant decrease in an economy’s GDP that lasts for 6 consecutive months or longer. This duration specification can make it difficult to classify a recession until mid-way through the recession or after the fact. People are likely to see higher prices, layoffs, hiring freezes, and lower stock prices long before a recession is declared.
When classifying recessions, experts will look at the overall economic activity. They will consider the unemployment rates, manufacturing activities, inflation, interest rates, and the GDP. The economy has to be declining as a whole (impacting multiple industries) for at least 6 consecutive months to be classified as a recession.
Economic decline affecting 1 or a few industries is not a recession.
How Long Does a Recession Last?
Each recession is different, so it is difficult to give a concrete answer about how long recessions last.
Since WWII, recessions have lasted 10 months on average. However, the Great Recession in 2007 lasted 18 months. This brought the average length up, as many recent recessions lasted around 8 months. The shortest-ever recession in the US was the Covid-19 pandemic. That recession lasted only 2 months.
The United States has experienced only 4 recessions in the last 30 years:
- The Covid-19 Recession – 2 months (the shortest recession in US history)
- The Great Recession – 18 months
- The Dot Com Recession – 8 months
- The Gulf War Recession – 8 months
There is no way of knowing how long a recession will last until the recession is over. Even then, the effects of the recession are often felt long after the recession has officially finished. It can take months or sometimes years for the unemployment rate to return to normal, the job market to stabilize, and the stock market to recover following a recession.
When Does a Recession Become a Depression?
Recessions can become depressions if they last for a significantly long time or bring significant economic decline. For example, the 2007 recession was still a recession, even though it lasted for a long time and brought the biggest economic decline since WWII. However, it was not classed as a depression. Experts named it the “Great Recession” after the Great Depression because of its impact. The Great Depression lasted 10 years, though, so they are not comparable.
There is no hard and fast rule about when a recession is classified as a depression – experts have a reasonable amount of discretion here.
How Should I Prepare for a Recession?
Recessions affect everyone. Costs are higher, and earnings tend to be lower due to impacts on wages and investments. There are a few things you can do to reduce the impact a recession will have on you or your family.
- Have an emergency fund – An emergency fund will ensure you can pay your bills even if you lose your job. You can feel more confident knowing you have money aside in the worst-case scenario. Your emergency fund should cover at least 3-6 months of expenses. However, since the average recession lasts 10 months, consider putting aside 10 months’ worth of expenses in an emergency fund.
- Understand your risk tolerance – Your risk tolerance is the amount of instability you can weather in terms of your investments. Someone who relies on their investments for income or will rely on their investments soon has a lower risk tolerance. During a recession, you need to be able to stay the course, and your risk tolerance will tell you if you are able to do that. If you aren’t, perhaps you need to focus on your liquidity to better prepare for a recession or build a bigger emergency fund. Remember, investments can take a while to bounce back following a recession.
- Don’t panic sell – Selling your shares when prices drop may seem like a way to avoid bigger losses; however, the stock market usually bounces back after a recession. It is often better to hold onto your investments until long after the recession.
How Long Does a Recession Last?
The bottom line is we cannot know how long a recession will last or how it will affect us until it happens. The best way to prepare for a recession is to ensure you are as financially stable as possible in order to weather the duration of the recession. The average recession lasts for 10 months, so preparing for a 10-month recession is a good place to start.
Understanding which business industries are most resistant to recession can help individuals focus their career paths or investment strategies.
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