Inflation has been a hot topic in today’s world. Talk of recession has been more prevalent, and words like stagflation and economic depression have been tossed around by economists. Many have wondered whether or not we’re living in an economic recession or a depression.
In times like today, it’s essential to know the signs of a recession, how it’s different from depression, and how to predict what’s next. This will help you prioritize your finances and prepare for a turbulent economy.
What is a Recession?
During a recession, people lose jobs, companies sell fewer products and services, and the country outputs fewer products overall. An official declaration of a recession depends on several factors. Gross Domestic Product (GDP) is the total value of all goods and services produced within the country. A healthy economy expands over time, and the GDP measures that growth.
When the GDP shows two consecutive quarters of a decrease, it illustrates underlying economic problems and points to a recession. As of May 2022, the GDP decreased at an annual rate of 1.5 percent in the first quarter of 2022. Second-quarter results will help determine the recessionary state of our economy this year.
The National Bureau of Economic Research (NBER) is generally the recognized authority that defines the start and end of a recession in the U.S. NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” As of June of 2020, due to the unique circumstances of the pandemic, NBER officially declared the end of a 128-month expansion and the beginning of a recession. By April of 2020, the recession was over.
Recession vs. Depression
When we hear about depression, many visualize images from the Great Depression. Lasting from 1929 — 1933, the Great Depression saw unemployment at about 25 percent, and the GDP fell by 30 percent.
Generally, a depression has more significant job losses and steeper declines in the GDP than a recession. Depression lasts years and is difficult to escape. The U.S. economy is dangerously close to another recession that could lead to an economic depression.
Predicting a Recession
A few indicators of an impending recession can help you prepare ahead of time. The first is a sharp decline in consumer confidence. Usually measured by surveys, people will indicate they don’t feel confident spending, slowing the economy. A sudden stock market plunge is another sign of recession. This tells us that investors are selling off parts of their holdings, anticipating an economic downturn. When people start losing their jobs, it’s a sure sign of a recession.
Greatest Threat
The writing is on the wall for a potential recession or continued inflation at best, and it’s essential to address the greatest threat to financial stability, high-interest debt. If you have credit card debt or variable interest loans, make it your top priority to settle these debts.
As the Federal Reserve tries to fight inflation, it will continue to raise interest rates. Credit will become more scarce, and those minimum payments might go up. If you haven’t taken a look at your budget in a long while, give it a hard look to discover where you can cut. Reinvest the savings into paying down these debts. Your future self will be appreciative.
Ways to Prepare
Aside from reworking your budget to eliminate high-interest debt, always be exploring practical ways to save a buck. Inflation and recession are big scary words that can be whittled with daily spending habits. Although the problem on the horizon looks huge, take small daily steps to adopt a new mindset that sets you up for success.
Let go of Convenience
Gas prices are through the roof in today’s economy. Although few meals are cheaper than some fast food places, avoid the drive-thru. An idle car burns more fuel than restarting the engine. It’s estimated that a typical vehicle burns about a half gallon of fuel every hour of idle time. It may be convenient to sit in the car and jam out to your favorite song while waiting for food, but it’s a waste of money..
Maximize Cash Back
Only use this option if you’re not carrying debt on your credit card. If you’re enjoying a zero balance on your credit cards, find out which ones have cash-back offers. This is an excellent opportunity to purchase groceries, gas, and other daily items and reap a cash reward. As long as you pay the balance within 30-days, you’ll pay no interest.
Consult a Professional
Debt can be a fickle beast. Financial options are often unclear to the untrained eye, and the added stress of making payments with money you don’t have can cloud judgment. Don’t spend another second going through your budget for the dozenth time; contact Advocate Debt Relief. We’ll help you find an option you can live with, so you can let go of that unwanted stress.
