recession
A recession is when an economy shrinks instead of growing, usually meaning fewer jobs, lower earnings and harder credit.
In plain English
A recession is the technical name for a period when a country produces less than it did before, typically measured as two consecutive quarters of falling output.
The definition is dry. What it means is not. Businesses sell less, so they hire less, so they let people go. Those people spend less, so businesses sell even less. It feeds itself for a while, and that is why recessions are frightening even to people whose own job is safe.
For you personally, three things matter. Your income becomes less certain, which makes an emergency fund far more valuable than it seemed last year. Credit becomes harder and more expensive, exactly when people need it most. And asset prices usually fall, which is painful if you must sell and useful if you are still buying.
That last point is where fortunes quietly change hands. The person who keeps investing steadily through a recession is buying good things cheaply from people who are frightened. The person who sells everything to feel safe locks in the loss and misses the recovery.
Prepare before, so that you can be calm during.
A recession hits and your company reduces staff. Because you built six months of essential spending in a money market fund, you have time to find the right role rather than accepting the first offer out of fear. That fund did not earn you much. It bought you your dignity.
Questions people ask
How long do recessions last?
They vary enormously, from a few quarters to several years. Nobody can tell you in advance, which is precisely why preparation beats prediction.
Should I stop investing during a recession?
Historically, continuing to invest steadily through downturns has rewarded people well, because you buy more units at lower prices. Stopping means you only ever buy when things are expensive.
What is the difference between a recession and a depression?
A depression is far deeper and far longer. Recessions are a normal, if unpleasant, part of how economies move.
Last reviewed