Recession Q & A
- Nick Allen
- 2 days ago
- 3 min read
Over the last four years, you may have heard the many warnings of an impending recession. Despite media outcry, a recession has yet to hit, with a brief exception at the height of the pandemic. With the recent market volatility, primarily induced by current trade policy, let’s answer some of the questions we commonly hear regarding the word “recession.”
What is a recession?
In short, a recession is defined as a period of economic decline. This means that rather than growing, the economy is shrinking. When an economy is shrinking, it means that consumers and businesses are spending less money. A more fiscally conservative approach sweeps across the nation as uncertainty leads people to pull back and focus on the bare essentials. The ripple effect can be wide as companies lay off employees and demand decreases for goods, bringing prices down. This can also mean investor sentiment declines and money floods out of equities and into less volatile investments like bonds.
What are some of the indicators of a recession?
GDP: Gross Domestic Product is the total value of goods and services produced in a country during a year. This number can fluctuate, and a decrease in GDP is a primary indicator of a recession. A common measure of whether a country has entered a recession is two consecutive quarters of declining GDP. While it is a key indicator, it is by no means the only factor to consider.
It’s important to note that we likely won’t know we are in the midst of a recession while it's happening. GDP helps economists look back at what has taken place in the economy. When we look back, we’ll realize what we lived through, which brings to mind a poignant moment from The Office, when Andy Bernard says, “I wish there were a way to know you were in the good old days before you actually left them.” While a recession isn’t exactly “the good old days”, it’s the retrospective lens that allows us to see a moment in a way we simply can’t in the present. In other words, the lagging indicators are the ones that reveal the reality of a recession.
What are lagging indicators?
While leading indicators predict economic events and conditions, lagging indicators are economic data points that pivot after the conditions of the economy have already changed, much like a tornado warning confirms that a storm is already underway. Lagging indicators would include things like interest rates, earnings from corporations, and the unemployment rate. The presence of these things alone does not mean a recession has taken place, but they do help paint the broader picture.
What will a recession mean for my investments?
As mentioned above, a recession can mean that investors pull their money out of the stock market and put it in places subject to less volatility. In a recession, many investors are scared to stay invested and/or put more money into the market. In reality, as the value of investments drops, it presents an opportunity to “buy low.” That being said, everyone’s situation is different, so consult with a financial professional to see what is right for you when it comes to investing in a recession.
Despite what the pundits may be saying, we don’t know if a recession is coming, and there is really no good way to know for sure either, until we look back in time. Historically speaking, the market and the economy have always recovered from recessionary territory.
If you have questions about investing, reach out to your financial advisor to discuss these questions. Our team of advisors is always willing to help and offer guidance to reach your financial goals.
