Are We in a Recession? the Answer Isn’t That Simple

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• A recession is a significant decline in economic activity that can last months or even years. 
• Most experts agree we aren’t in a recession yet, but that we could be headed for one in 2024.
• There are steps you can take to prepare emotionally and financially for a recession.

Although the U.S. is not currently in a recession, economists fear that one may be on the horizon following a stock sudden stock market slump in August.

Remember that a recession is not the same as a depression, described as a more extended and severe version of a recession.

It’s important to note that no one can predict the stock market’s direction. While financial and stock market experts will speculate based on recent economic trends, the market is often unpredictable. 

A recession is not the same as a depression

Generally, a recession is defined as two consecutive quarters of negative GDP. However, many argue this definition is overly simplistic since it doesn’t consider employment, income, sales, and a range of other factors.

The National Bureau of Economic Research (NBER) uses a broader definition: a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Are we in a recession in 2024?

While there’s still some debate, the answer is no, the U.S. economy isn’t in a recession. Although inflation persists and interest rates continue to rise, there’s widespread agreement that the overall conditions consistent with a recession have not been met. 

The July 2024 report from the Labor Department revealed that unemployment rose to 4.3%, the highest it has been since 2021. This sparked concerns that a recession may be approaching. Job gains of around 150,000 are considered an indicator of a strong economy. Unfortunately, only 114,000 jobs had been added that month. 

The Friday following the report, the Nasdaq dropped about 10% from its most recent high, the S&P 500 dropped 1.8%, and the Nikkei 225 index dropped 6%.

Are Feds cutting rates?

The Federal Reserve issued multiple interest rate increases in 2022 and 2023 to slow the economy and lower consumer demand during the pandemic era. However, this risked a recession. Interest rates have remained unchanged through the end of 2023 and the first half of 2024. 

The Federal Reserve has announced it will likely cut rates in September following the most recent meeting. Some economists fear that the Feds have held off cutting rates for too long, which may be hurting the labor market. That, of course, is speculation.  

Will there be a recession in 2023?

There’s no way to predict a recession, but there are certain warning signs economists watch out for. One significant indicator is when the yield on 10-year Treasury bonds drops below that of two-year Treasury bonds. This is called an inverted yield curve, indicating investors are losing economic confidence. 

Although we aren’t yet in a recession, there has been deepening concern that we’re headed in that direction.

Who decides when a recession has started? 

The National Bureau of Economic Research’s Business Cycle Committee is the authority that decides whether or not we’re in a recession. The NBER is a private, nonpartisan organization that analyzes major economic issues.

“The Business Cycle Committee labels all parts of the US economic cycle — the peak, the trough, etcetera,” Custovic explains. “They have a set of criteria to identify a recession.”

And since the release of macroeconomic data usually lags the periods for which it is collected, by the time the NBER does declare a recession, we’ve often already been in one for at least a few months. 

How long does a recession last? 

How long a recession lasts depends on its severity. But they don’t usually last as long as most people think. According to data from the NBER, the average recession since 1854 has lasted about 17 months. 

Custovic points out that if we look at more recent examples — like from 1945 to 2020 — the average length of the economic contraction in the US is a little more than 10 months. “This suggests that the length of recessions are getting shorter now compared to historical ones,” she says.

In February 2020, the US economy’s expansion peaked, and the next month, the country fell into a recession caused by the COVID-19 pandemic. The NBER concluded that the recession lasted two months, making it the shortest on record.

How to prepare for a recession 

The financial impact of a recession spreads throughout the US economy, with lower-income families getting hit the hardest. So it’s essential to prepare ahead of time. This doesn’t just mean preparing yourself financially.

Custovic says it’s most important to prepare emotionally, as recessions can be frightening, particularly for retirees and investors. “People can make emotional decisions like pulling all cash out of the market when they get scared, and history has proved over and over again this is not the right thing to do,” she says.

Since we never know how prolonged or severe a recession will be, preparing for the worst’s a good idea.

“This means having at least a few months’ worths of expenses saved up in case you become unemployed and need to search for a new job,” Custovic explains. “Also, I highly recommend holding off on any large-scale purchases until economic uncertainty fades.”

At the same time, Custovic recommends evaluating any investments you have to ensure a good mix of assets, reducing your risk of experiencing massive losses if a few of them underperform. 

“Make sure your investments are well diversified and can weather the storm of economic uncertainty,” she says.

The best way to protect your assets and decrease your overall risk of losing value is to have a diverse investment portfolio. If you’re struggling to diversify your investment portfolio, the best investment apps offer a range of investment choices, market access, educational resources, and low fees.