Are We In A Recession? How To Prepare

Theories for how we’ve been due for a market correction have been circulating for some time now. Economists have warned that the most recent and longest economic expansion in history would come to an end eventually. In recent weeks, the coronavirus has brought these theories to life more suddenly than expected.

News about COVID-19 has been spreading rapidly all over the world, causing corporations to halt operations, organizations to cancel major events, and people to panic.

When uncertainty muddies the waters, people take to the markets like sharks on chum, quickly pulling investments to keep them safe. As we’ve seen in recent weeks, this can cause markets to drop at an alarming rate. If news about COVID-19 wasn’t enough to put you on edge, the way the markets have been acting probably is.

So, is a recession nipping at our curtails, or are we already in one?

In order to answer the question of whether or not we’re in a recession, we have to understand what exactly a recession is and what happens during a recession.

The National Bureau of Economic Researchis the organization responsible for analyzing U.S. business cycles. They’re the official authority for determining peaks, troughs and turning points in the U.S. economy.

The NBER defines a recession as: “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.”

Let’s take a look at a few of these key indicators and how they’re currently showing up in the U.S. economy.

GDP 

Gross Domestic Product, or the value of goods and services produced in the U.S., is expected to drop anywhere between 12% – 24% in quarter 2 of 2020. This would be the largest drop recorded since World War II.

Income

Companies like Six Flags, Nascar, MoneyGram, Disney and more are having frontline employees as well as executives taking pay cuts to be able to stay afloat amid losses from COVID-19.

Large automakers like General Motors and Fiat Chrysler Automobiles have cut salaries as well. General Motors placed 6,500 workers on temporary leave with a 25% pay cut and reduced the pay of employees who are still working by 20%. GM vows to pay the missed money in a lump sum by March 15, 2021.

Employment

Jobless claims for the first round of layoffs due to the effects COVID-19 rolled in at 3.283 million. Unemployment is expected to rise sharply within the months to follow. Economists at the Federal Reserve’s St. Louis district estimate a total of 47 million employment reductions, taking the unemployment rate to 32%. For reference, the unemployment rate during the Great Depression was about 25%.

Industrial Production

Factories across the country are being forced to halt operations. Employees are being laid off and told to stay home in order to slow the spread of the COVID-19 outbreak. Significantly reduced employees directly translates to significantly lower output.

Wholesale-Retail Sales

Retail sales were already down 0.5% before the coronavirus started showing up on economic data. Now, customers are concerned about being in public, and most retail storefronts have been forced to close their doors for the time being. There have also been major supply chain interruptions across the board. Even Apple expressed concern for both a shortage of replacement iPhones as well as a shortage in demand for products.

Looking for the most recent information on these topics? The current state of most of these indicators and additional market data is broken down weekly in Market Updates.

The NBER doesn’t typically release an announcement of a market turn until months after the event in order to ensure accuracy. Since it’s only been a short period since COVID-19 began to negatively affect the economy, the short answer is that it’s too early to tell if we’re in a recession or not. However, the signs are all there, so it’s highly likely there will be an NBER-defined recession announced soon. If you haven’t yet, now is the best time to prepare.

Even if you don’t believe that we are on the cusp of another economic downturn, it’s always smart to be prepared. In fact, the way that you structure your earnings, savings and investments today can not only make it easier to survive a recession, but can even allow you to thrive regardless of what’s going on around you.

There’s only so much that you can do to overcome the impact of a potential recession, of course. Luckily, by taking a few preparatory steps, you can soften the blow if and when one does hit.

First, The Basics

Some of the most fundamental things that you can do for your finances today will also wind up being the most impactful during an inevitable economic downturn. These moves really fall into three simple categories: save more, spend less, and get out of debt.

Saving more money means setting aside a solid emergency fund, saving up 3 – 6 months’ worth of expenses as a safety net, and padding your retirement savings as often as you can. That way, you’re not only prepared for the long term, but you’re also secure when hard times hit. You also won’t be forced to use high-interest credit cards during tough times, or take out a personal loan, which may be difficult during a recession.

Spending less today allows you to allocate more money toward savings and getting out of debt faster. Even more important, though, is that you’ll be accustomed to spending less on a monthly basis. If and when a recession hits, you’ll already be able to survive on a smaller budget rather than living paycheck to paycheck.

Lastly, getting out of debt should be a priority for everyone, but is especially important if you’re trying to recession-proof your finances. Clearing credit card balances saves money on finance charges while also clearing up available credit in case you need that added safety net. It also protects you in case interest rates are unexpectedly increased.

More importantly, though, getting out of debt frees up your budget by eliminating monthly obligations on the balance. You get to decide where your money needs to go, rather than having it locked into minimum payments.

How To Recession-Proof Your Portfolio 

Be proactive in reducing susceptibility by recession-proofing your portfolio before hard times hit. While this is helpful in your 20s and 30s, it’s especially important in your 50s and 60s, which is where risk tolerance comes into play.

The younger you are – and the further away you are from retirement – the easier it is to ride out a recession. You won’t need to draw from your retirement accounts for a while, so you have time to allow investments to recover. This means that you can take on greater risk.

However, if you are only a few years from retirement or already relying on your portfolio for income, an economic downturn could be devastating ... if you have the wrong investment strategy.

Be sure that your portfolio is properly balanced and that you’re only assuming as much risk as you can afford. If you don’t have years to recover from a big portfolio hit, rebalance your portfolio now to include more “safe” products – like bonds and CDs – and fewer of the riskier ones, like individual stocks.

It may also be wise to lock some of your more liquid assets into savings accounts with today’s higher interest rates. That way, you have money available quickly if and when you need it, without needing to sell investments that may have dropped in price. Plus, those savings can continue to grow at a decent return in the meantime. 

What To Invest In During A Recession

Each recession is a bit different, and the impact on investments can vary. By heavily diversifying before a recession hits, though, you spread out the potential risk and allow yourself to better tolerate the tougher years.

This may mean investing in things like rental properties, which traditionally thrive during and after a recession, and putting your savings in accounts with fixed-rate returns, versus variable rates that would plummet with an economic downturn.

If possible, use recession prices as an opportunity to boost your portfolio for the years to come. This means scooping up investments at lower prices whenever possible. Then, when the market bounces back, you cannot only recoup your losses but see huge growth in the process.

This is an especially important concept for millennial investors, who will see many decades of growth on their investment portfolios before retirement time comes. It’s always smart to buy low … so when prices plummet, you may want to buy even more.

Recession-Proof Jobs

Unfortunately, there are no jobs that are truly recession-proof. Every position in every industry is at risk in one way or another.

You can, however, avoid jobs that are vulnerable to instability and market downturns, so that you are afforded more security during a recession.

To avoid susceptibility in your career, be careful with jobs in the service, gift and travel industries. These sectors are often hit hard and early following market downturns, as people tighten up their discretionaryspending. When families decide to trim the fat in their budgets and cut out the excess, things like vacations and frequent meals out are some of the first to go.

Instead, pick an industry that’s just as important when the economy is booming as when it’s tanking. Jobs providing healthcare, beauty and childcare services, for example, tend to remain steady even during periods of recession. Additionally, there are some sectors that thrive in economic downturns, such as renovation services and discount retailers like Walmart.

Whatever industry you choose, make yourself a valuable asset to the company. The best way to ensure security during economic downturns is to be directly linked to revenue generation. If you possess a very specific set of skills, leverage those to make the company more profitable. If you’re in charge of running a program or process well that nobody else knows how to run, it will be more difficult to let you go. This is especially true if that program is driving income for the company. If you’re constantly finding ways to bring in more revenue to the company, you’ll set yourself apart and solidify your employment in any position.

Another option to help supplement your main income is to take on a side hustle or two. If you do your best to live off the money you take in with side gigs, you can put away the majority of your main income after bills. The more money there is coming in, the more you’ll be able to save. Plus, if you do find yourself unemployed, you have an income to fall back on and a little extra in your savings to help you get by.

The concept of an impending recession can cause brows to furrow and teeth to clench, especially for those who witnessed the years of financial recovery following the 2007 – 2009 market downturn. While unpleasant, recessions are necessary evils in economic business cycles.

By preparing today, you can ensure that you’re not only ready for the next recession, but you can even use this market slump to your advantage. As long as you’re prepared with a solid safety net, aren’t bogged down with debt, and are ready and willing to ride out investments that may have temporarily lost value, a recession can prove to be a very beneficial thing.

It’s impossible to make yourself recession-proof. Butwith a little strategy and dedication, you can help ensure your family and your assets are as recession-resistant as possible, and be fully prepared for whatever the economy brings in the coming years.