In economics, a recession is defined as a period of temporary decline in a country’s economic activity. Disruptions can include a litany of setbacks; in the current climate of medical unrest and uncertainty, the economy has fallen into a “coronavirus recession.” Our economy operates cyclically, so ostensibly if it slows down, it will inevitably pick up again. According to the National Bureau of Economic Research (NBER):
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”
The NBER is a non-partisan organization that conducts economic research and observes fluctuations in economic cycles, specifically the periods between highs (called ‘peaks’) and lows (called ‘troughs’) in economic activity, which are recessions. The periods between troughs and peaks are called expansions.
In longer recessions, the Gross Domestic Product (GDP) can suffer dramatically. With the COVID-19 pandemic effectively shutting down the United States, it seems as though all bets are off; pundits and naysayers alike are wondering when we’ll see an uptick in economic activity.
What are the warning signs of a recession?
According to the NBER, there have been a total of 33 recession cycles lasting an average of 17.5 months since 1854. The last expansion began in June 2009, which means the US has enjoyed economic growth for over a decade. However, with coronavirus sweeping the world, the US has found itself in an unprecedented nosedive, where yield curves and interest rates don’t apply. While we’re not exactly economists, Parentology has gathered a few key factors below that could indicate during this time of coronavirus a pending recession:
- Excessive spending: Examples include the housing bubble, or the tech bubble in the early 2000s.
- An economic shockwave: Such as the collapse of a major financial institution or spikes in oil prices.
- Loss of confidence: Simply put, when consumers feel good about the economy, they spend more. Conversely, if spending slows, it could indicate the arrival of a recession.
- Factories slow down: When the Institute for Supply Management index (ISP) drops sharply, a recession usually follows.
- A rise in unemployment: A rapid rise in job loss indicates that a recession is either underway or has already arrived. This is an area that’s been highly impacted by the coronavirus recession.
- The stock market crashes: While the stock market sustains losses on a fairly regular basis, a drop of 20% or more for a duration of approximately 500 days — called a prolonged bear market — will cause the economy to plummet.
- Rise of credit card debt and late payments: Spending is great for the economy. But an increase in late payments, card delinquency and rising bankruptcy rates can put a strain on banks and ultimately, on the economy.
What you can do during a coronavirus recession
Everyone will feel the effects of a recession. Unemployment will go up while the GDP goes down. Certainly, someone with no children and a steady income will fare much differently than an unemployed single parent, but there are some things you can do (and should never do) while practicing social distancing.
Ideally, consumers would have a diverse long-term investment portfolio that can withstand bear markets. But not everyone has access to wealth management resources. Our first piece of advice? Don’t panic.
“Now is a good time for investors to not only look at their to-do list but to make sure that they have a to-don’t list,” Mitch Goldberg told CNBC in a recent interview. Goldberg is the president of ClientFirst Strategy in Melville, New York. “Don’t panic, don’t make hasty financial and investment decisions,” Goldberg said.
Do your homework
A large part of the workforce has already been affected by shutdowns and closures due to COVID-19 and the resulting economic downturn. While you can’t know for sure if your role is next on the chopping block, you can look at your current employment for clues:
- What is the financial state of your company?
- How have they invested in you as an employee?
- Can you determine your job stability? Would it be easy to replace you?
Perhaps this is a good time to polish your resume and acquire a new skill set. Try online courses through LinkedIn or Lynda.com. Regardless of the state of the economy, staying invested and involved in the work world will serve you well, whether or not your job is on the line.
Make a (new) budget
Now is the time to analyze your finances and make some tough decisions. Many people find it useful to track their spending to see where their money goes so they can better reassign it. There are a host of personal finance apps to help you budget better:
- You Need a Budget
- Personal Capital
- Clarity Money
Be savvy about your debt
Credit card or other consumer debt will be much harder to manage if you lose your job, so it’s important to review what your overall liabilities look like. “The recent CARES Act provides consumers with more flexibility around borrowing from their 401K, but do this with caution,’ Rhian Horgan, CEO of Kindur, a digital retirement company serving Baby Boomers, said. “While 401K loans have low-interest rates and don’t impact your credit rating, you are risking your future retirement security. Consider reducing your discretionary spending and using this money to pay off higher interest rate debt.”
Get a side hustle during the coronavirus recession
Establish different income streams with a side gig. Sites such as Upwork or Fiverr pay for freelance work in a plethora of disciplines. Bonus points if you’re already an expert in your field and can write professionally about it. As an added incentive, working with clients on these sites will build not only your reputation as an industry insider, but will build your professional network as well.
Don’t put all your eggs in one basket
If you do invest, now is the time to diversify your portfolio and protect the assets you already have. Speak to your financial advisor before making any major investments.
The more you know
Want to know the different types of yield curves? Want to know how coronavirus has impacted the economy? Now might be a good time to take a crash course in economics. Read financial news online or in print, seek out experts and pick their brains, and stay in the know. (By the way, an inverted yield curve has predicted the last seven recessions.)
Grow an emergency savings fund during the coronavirus recession
While it may not be of use right now, there’s no better time to start thinking about a future emergency savings fund to protect you and your family. It never hurts to prepare for the worst. Economists say a good rule of thumb is to have six months of salary saved up in the event of a disaster or financial downturn.
While that sounds unattainable, Horgan advises there are small, simple measures that can help you achieve your savings goals. “Many consumers will receive stimulus checks this week. This is a great start to your emergency savings fund,” she said. “Also think about using your side hustle or part-time income to build up this fund. There have been increases in remote job opportunities recently, so whether you are in your 20s or 60s, there are ways to secure part-time income.”
Ultimately, the economy will continue to ebb and flow, but the most important thing to keep in mind is the health and safety of your loved ones while weathering the storm. Being aware of your finances and taking a crash course in financial literacy will go a long way towards enduring this economic crisis while preparing for the next one.