What Is The Effect Of Recession?

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Recession

No one likes to hear the word “recession”.

What does it really mean? Here’s an explainer:

During a recession the economic growth of a country falls dramatically.

In the United States, the effect of recession can be seen as follows:

  • The stock market declines and enters a bear market
  • Investors start buying Treasury Bonds and this causes the interest rates to fall
  • Employers reduce new hiring and then they start laying off workers

These are the major effects of a recession.

In order to revive the economy, the Federal Reserve usually starts lowering interest rates to start business lending and to give impetus to investment.

In addition, occasionally during a recession, the Federal Government may introduce tax breaks to get consumers to spend.

The US is currently facing a slowdown in the economy and recession seems eminent. This slowdown started with the decline in the housing market, which was began with the sub-prime mortgage crisis.

As a result the home values have fallen by as much as 10 percent and if recession sets in, values will decline by another 5 to 10 percent.

The biggest effect of recession will be unemployment.

It has been seen that many companies cutting their weekly budgets and job seekers are no long welcome. Female workers are usually the first to get laid off during a recession. These are women who work as receptionists, do odd jobs in the office, public relations and communications. They are usually the first ones to be picked out when downsizing in an organization begins.

In addition, recession also has effects on business like advertising and sales because these will be expenses that most companies will cut first.

Many companies have large budget for advertising in print and electronic media and when recession hits, all forms of advertisement are stopped or reduced at lower budgets.

PR companies end up working on very tight budgets and the only retain employees who are needed the most.

Related: Inflation Definition

Recession Definition Indicators

Before we talk about recession indicators, first let us look at what an economic indicator is.

An economic indicator is any economic statistic like unemployment rate, GDP or inflation rate that indicates how well the economy is going to perform in the future.

These economic indicators allow us to figure out whether the economy is going to boom or go into recession and based on the information, we can decide our investment strategies.

Recession indicators are also economic indicators that allow us to see that the economy is heading into a downturn.

When the GDP is in negative for two consecutive quarters, we can conclude that recession is setting in.

However, the official judge of when recessions start and end is the National Bureau of Economic Research (NBER).

The take into consideration the following recession indicators to determine whether recession is starting or ending:

  • Industrial production
  • Payroll employment
  • Inflation adjusted personal income
  • Volume of sales in manufacturing and trade sectors

Usually the NBER takes nearly 6 months to recognize the recession indicators and to announce it.

Since recessions usually last 6 to 18 months, the recession could be potentially over by the time NBER makes an announcement of a recession based on the indicators.

That is why economists study other recession indicators to see when the economic slump starts and they are as follows:

  • Slower consumer spending
  • Impending drop in interest rates
  • Rising unemployment
  • Prices of goods like food, gas and clothing rising faster than wages

Related: Foreclosure Definition and Meaning – All About Foreclosure Process

Benefits Of Economic Recession

Today the United States is facing recession and people are afraid even to think about it.

But there is no need to fear an economic recession.

The reason being very simple – there are benefits of an economic recession.

When economic recession takes place, we are getting respite from economic growth.

During recession, economic growth slows down due to a chain of events which ultimately leads to market correction.

Certain segments of the economy get over-heated and recession is the period when the cooling off process takes place.

Recession also helps to reduce consumption and imports.

Countries which have huge trade deficits can take advantage of an economic recession to cut down their deficits.

In addition, the recession also forces people to start saving as there is a tendency to put aside money for emergency in case you are laid off.

Besides this, there are other benefits to economic recession and they are listed below:

  • During an economic recession, house sales reduce as at a result housing prices start decreasing. A recession is beneficial for those who have the deposit money ready and are interested in purchasing a home or investing in property. Once the recession is over, you can sell the property for a sizable profit.
  • If you are looking for long term capital gains, buying undervalued stock during recession should be your goal. During an economic recession, most people take out their money from the stock market, thus driving it down. If you are knowledgeable about stock market, this is the time to invest.
  • Recession is the best time to buy a home using a mortgage as the Federal Reserve invariably reduces the interest rate, so the mortgage becomes an affordable debt.
  • As the economic recession worsens, people tend to purchase less to save their money. This is the time when retailers start offering great deals to consumer on a variety of products, which otherwise would have been rather expensive to buy.

Best Investments In Recession

The first thing that you should do when finding the best investments in recession is to put aside money to build a reserve fund.

This is especially true for people who work as employees. As recession starts or there is a hint of recession, the risk of getting laid off increases and keeping a reserve fund will help you and your family.

Most financial planners will advice you to set aside money equivalent to 6 months worth of living expenses.

This money should be liquid and not invested into any type of investment vehicle.

This is because you will need access to hard cash if you do end up losing your job.

Once you have put aside money into a reserve fund, you are all set to find out which are the best investments in a recession.

Before you go ahead and start investing, you should ask yourself the following questions:

  • Will the recession go away during my lifetime?
  • Will large companies like Coca Cola or Procter and Gamble be in business 20 years from now?

If you have answered yes to the above two questions, you already have your strategy ready for best investments in a recession.

We all know that in the long run, a recession usually goes away and economy comes back to normal. The decline in stock prices during a recession is always temporary and still investors are too scared to do any investments during that period.

Recession is always a good time to investment but unfortunately most investors shy away from it because they are afraid of losing their money or do not have the money.

The best investment during recession is to buy shares of well established companies like Coca Cola because the price of the shares will be low.

It is better to buy shares of company when it is low and this opportunity is only provided during a recession.

A wise investor will always grab this opportunity with both hands.

The good news for you is that many investors end up selling shares when the stocks fall and this is the time to jump in buy the shares dirt cheap. Once the economy recovers, your shares of stocks will be worth quite a bit.

How Recession Affect Mortgage Prices

A recession is defined as decline in the economic activity of a country and this usually lasts for more than a few months.

Basically, during recession, the gross domestic product (GDP) of a country declines for 2 or more successive quarters in a year.

If the recession lasts for a long time, it is known as an economic depression.

Usually recession is caused by events that have an impact on the economy of a country.

Some of the events are as follows:

  • Decline in consumer confidence
  • Increase in interest rates
  • Organization reduce output and then layoff workers

During recession people start spending less money and this fiscal conservatism also affects the real estate industry and the demand for homes start decreasing.

People put off buying and selling property and homes during a recession. As a result the mortgage industry is forced to reduce interest rates in order to attract consumers.

For people who already have mortgages, recession has no effect on their mortgage rate.

Instead they are always living in fear during recession as they might lose their jobs and will not be able to afford to pay back the mortgage.

But for potential homebuyers, recession has a positive impact.

As mortgage rates during recession are lower, people who have the ability to pay a down payment on their homes can lock interest at low rates; thereby reducing the monthly installment substantially.

This is one positive aspect of recession where many people who otherwise would not have been able to buy homes can go ahead and make buy one.

Related: How Debt Consolidation Works?

Major Causes Of The 2001 Recession

Through out history we have seen that economies all over the world experience some sort of fluctuations.

The reasons for fluctuations vary and so do the durations.

National output can rise and fall for a variety of reason like what happened during the 2001 recession.

There were four major causes for the 2001 recession. They are as follows:

  • The technology boom that occurred in the 1990s got carried to unsustainable speculative heights.
  • The Federal Reserve Fund caused too much money to be channeled into higher asset prices like real estate and stocks rather than the price of consumer goods
  • The fraud done by corporations, stock brokers, stock exchanges and mutual fund companies, which was considered to right through the financial markets.
  • September 11 attacks, which resulted in dire losses couple by the expensive War on Terror.

Although the 2001 recession was bad but it affected just certain industries like airlines.

In addition, stock markets were also affected wherein we saw stock prices falling.

There was unemployment during the 2001 recession but it was not considered as bad as during other periods of recession.

It is believed that economy of the United States was sustained because of the boom in the real estate market.

In addition, the 2001 recession was not so bad because the Federal Reserve pumped money into the financial markets to keep the short-term interest rates low.

In fact, during the recession, the short-term interest rates lower than any other occasion. Coupled with this, the tax cuts helped the economy to recover by stimulating investments and enterprise.

Economic Recession In 70s

The economic recession in the 1970s was the worst economic performance that United States faced since the Great Depression.

Although the economic depression was not as bad as what had occurred in the 1930s, the economic growth rates were much lower than the previous decades.

The economic recession in the 1970s was heralded due to loose domestic spending and the funding provided for the Vietnam War.

In addition, the oil crisis in 1973 and 1979 did nothing to make the recession any better. Due to high oil prices, most American businesses were compelled to increase their prices and this led to further inflation.

According to statistics, the average annual inflation rate from 1900 to 1970 was approximately 2.5 percent.

However, from 1970, the average annual inflation rate jumped to 6 percent and it reached its peak in 1979 when the rate touched 13.3 percent.

This period is known as stagflation, where inflation and unemployment increased steadily. By 1980, inflation was a whopping 21.5 percent.

The term stagflation was coined during the economic recession in the 70s.

It described an economic condition of continuing inflation along with stagnant business activity which led to increasing unemployment.

During the 70s, because of inflation people expected prices of goods to rise so they started, so they started buying in bulk.

This in turn led to an increased demand and automatically pushed the prices up. The 70s was a period when inflation seemed to feed on itself.

It was during this period that the government needed funds to pay for the Vietnam War so it kept borrowing, which in turn increased the budget deficit.

This resulted in interest rates being increased which further led to increase in costs for businesses and consumers alike. High energy costs coupled with high interest rates led to high unemployment.

US Economic Recession History

It is important to study the US economic recession history as you will have a better understanding of how the current recession will affect your financial life.

Most recessions have significant effect on 401k investments and can have an impact on your retirement funds.

The last US recession was in 2001 and it started in March and ended in November. During that period major market indexes fell and the NASDAQ declined 70 percent during that year. It is believed that even so many years after, the NASDAQ has not managed to recover from that decline.

US Economic Recession History:

  • Panic of 1907 begins with a run on Knickerbocker Trust Company stock October 22, 1907 sets events in motion that will lead to a depression in the United States. Duration: 13 months
  • Post-WWI recession was marked by severe hyperinflation in Europe over production in North America. Very sharp, but also brief.
  • Great Depression causes the stock market crash, banking collapse in the United States sparks a global downturn, including a second but not heavy downturn in the U.S., the Recession of 1937. Durations: 43 and 13 months respectively.
  • Recession of 1945 was for 8 months
  • Recession of 1948 was for a duration of 11 months
  • Post-Korean War Recession — The Recession of 1953 was a demand-driven recession due to poor government policies and high interest rates. Duration: 10 months
  • Recession of 1957 – 1958 was for a duration of 8 months
  • Recession of 1960 – 1961 lasted for 10 months
  • Recession of 1969 – 1970 was for 11 months
  • 1973 oil crisis — a quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War leads to stagflation in the United States. Duration: 16 months
  • 1979 energy crisis – 1979 until 1980, the Iranian Revolution sharply increases the price of oil
  • The recession of 1981 lasted for 16 months
  • Early 1980s recession was caused by tight monetary policy in the U.S. to control inflation and sharp correction to overproduction of the previous decade which had been masked by inflation
  • Great Commodities Depression was from 1980 to 2000; general recession in commodity prices
  • Early 1990s recession was from 1990 to 1992; collapse of junk bonds and a credit crunch in the United States leads to one quarter of US GDP decline, and therefore, not an official recession.

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