What Is a Recession? Signs, Causes and What to Do

A recession is a significant drop in economic activity that spreads across the economy and lasts more than a few months. You will often hear the shortcut that two straight quarters of falling GDP make a recession. Official calls are broader. In the US, a committee at the National Bureau of Economic Research looks at jobs, income, spending and output. In Canada, the C.D. Howe Institute’s business cycle council makes the call.

Common warning signs

• Unemployment rising for several months in a row
• Consumer spending and retail sales falling
• Factory orders and business investment slowing
• An inverted yield curve, where short-term bond yields rise above long-term yields. It has often come before recessions, but it is not a guarantee.

What causes one

There is rarely one cause. Recessions have followed sharp interest rate hikes, bursting asset bubbles, banking crises, oil price spikes and sudden shocks such as a pandemic. Often several of these land at once, and falling confidence makes each worse as people and companies cut spending.

What happens to stocks

Stocks usually fall before a recession is officially declared, because markets look ahead. They have also often started recovering before the economy does. That is why selling in a panic can lock in losses right before a rebound.

What you can do

1. Build an emergency fund that covers several months of essentials.
2. Pay down high-interest debt.
3. Keep investing on a schedule if your job is secure.
4. Match your investments to your timeline. Money you need within a few years should not sit fully in stocks.
5. Keep your skills and resume current.

Recessions are painful but usually shorter than the expansions around them. This article is general information, not financial advice. Talk it over in the Smart Money Watch community.