What to Do With Money Now That We Are in a Recession
After several months of discussions, a short period of optimism, and then the start of a global pandemic, it became officially declared: we are in a recession.
This was announced yesterday by the National Bureau of Economic Research (NBER), which studies the peaks and valleys of the US economy, to make this determination.
“The usual definition of a recession is a slowdown in economic activity that lasts more than a few months,” the NBER committee said in a statement, noting that it also draws attention to how much the economy is contracting and the duration of the slowdown. The coronavirus pandemic, with its intense global reach, is the main factor that led to the designation of the recession.
This recession announcement was shocking because it was made so early. Yes, we know that the unemployment rate is cuckoo bananas and consumer spending is completely discarded due to the pandemic and its aftermath.
“The unprecedented scale of the decline in employment and production and its widespread impact on the entire economy justify labeling this episode as a recession, even if it turns out to be more short-lived than previous downturns,” the statement said.
But a recession is usually a period of economic recession lasting at least six months. And because the NBER then waits to see the monthly decline report, it doesn’t usually make a determination that we are in a recession until there is at least six months of bad economic news left. The committee that makes the appeal does not want to do it too early and send the economy into an even greater tailspin, which is getting worse and the negative consequences are already affecting the economy.
How long will the recession last? It probably won’t surprise you that it’s too early to talk about it. A recession ends when the economy stops declining, when it reaches its lowest point and begins to recover. The NBER argues that domestic production and unemployment are major indicators of economic activity, and therefore, when they both plummet suddenly, we will have to wait until there is an obvious recovery.
Here is a visual aid to help you visualize how the definition of recession is measured.
This graph shows industrial production as different from gross domestic production (GDP), but don’t get hung up on that for now. The important thing is that you can see the peaks and troughs that the NBER is looking at.
As you can see, the industrial production index peaked in 2008 and then dropped quite quickly. As soon as this line began to decline from the high point, the recession was watched. As soon as this decline reaches its lowest point, the bottom, the recession is declared over. (This gray shaded portion is the Great Recession.)
But, as you can see here, it can take years for the economic recovery to reach the point it was before this recession.
Then, of course, you go to 2020 at the far right of the chart and you see that the production index is just dropping towards the low point of the last recession.
Okay, this is the situation. So what can you do about it? How can you protect your money during a downturn?
Guess what: you already do it.
If last year your priority was to pay off your debt , then you are doing it. If you tightened your budget when the pandemic began to take its toll on US jobs, you will . If you lost your job and started calling to discuss your bills, then you are doing it. And if you’ve saved your work, but decided to postpone the search for a better one , you do it too.
As Ramit Sethi told us in a recent episode of The Renewal , it’s time to act urgently to protect your money now. Don’t panic – panic isn’t productive – but get defensive to bolster your budget and cut costs where possible.
There are many people who say that cutting your spending further leads to an economic downturn and, in fact, leads to a recession. But since we’re looking at the recession in hindsight (even now, with this early announcement), it’s safe to say that if we’re talking about taking action to mitigate a potential recession, we’re already in enough recession for him to notice.
By protecting your finances while paying your bills and struggling to make ends meet, you are not going to single-handedly rip football out of the US economy.
So be on your guard. Make your budget carefully. Spend carefully. Celebrate when you can. And have some faith in your ability to weather the recession, because whether you like it or not, you are already doing it.