The next recession: What are the signs and how to prepare
The U.S. economy is growing. The current expansion is the second-longest in U.S. history and will become the longest if it continues through the summer. However, this expansion will eventually end, and the economy will fall into another recession. But with proper preparation, everyone can be ready when it comes.
The Business Cycle
One of the basic parts of every economy is the business cycle. This describes how the economy expands and contracts over time. The broadest indicator of economic growth is the Gross Domestic Product, or GDP. In the long term, GDP has continued to grow, but every few years it experiences periods of contraction — or declines — in growth. These contractions are a natural part of the economy and they can even provide a much-needed reset, but in the short term they are difficult and stressful. Recessions often result in businesses failing and workers losing their jobs.
Signs of a Recession
One of the main economic indicators is the stock market, which can signal where the economy is headed. Investors respond to expectations of future economic conditions. If they anticipate growth in the near future, they buy. If they see worsening conditions, they sell. A drop in equity markets can therefore signal economic struggles down the road.
The unemployment rate is another critical indicator of economic health. While a high unemployment rate is bad for the economy, a very low unemployment rate also causes problems. When the unemployment rate is too high, as it was 2009, there are many job seekers and not enough job openings. This results in increases in long-term unemployment and workers who either can’t find a job or can’t find the right job for their skills and training.
As the unemployment rate drops, the economy improves. The ideal employment situation is one in which workers can find jobs and employers can fill their job openings. Surprisingly, a very low unemployment rate isn’t as great as it sounds, because there are many job openings but not enough workers to fill them. The resulting labor shortages hinder the ability of businesses to grow and forces them to increase wages.
This is good for workers but creates a further strain on employers, who must find a way to squeeze margins to remain profitable. Many companies raise prices to cover increased costs, which results in higher inflation.
If inflation goes up too rapidly, it hurts the buying power of money and increases borrowing costs. Left unchecked, this overheating can cause an economy to collapse, as is currently happening in Venezuela. To control this growth, the Federal Reserve Bank increases interest rates, which has the effect of slowing the economy. Although a slowing economy is certainly not ideal, it is sometimes necessary to prevent hyper growth and out of control inflation.
How to Prepare for a Downturn
While recessions are difficult and stressful, there are things that individuals, companies and governments can do to prepare. Cutting costs, saving money and reducing debt will create a greater cushion in times of hardship. Hopefully, the current economic expansion will continue long into the future, but taking steps today can help prepare for uncertainty.
Robert Spendlove is an Economic and Public Policy Officer for Zions Bank. To contact Robert, email Robert.Spendlove@zionsbank.com. Additional economic insights, including state and national economic trends highlighting indicators such as employment, demographics, housing, and more can be found online at www.zionsbank.com/economy.