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What Happens in a Recession: 10 things you need to know

Updated: May 6, 2023

A recession happens when an economy declines for more than two quarters in a row. In most cases, this means the Gross Domestic Product (GDP) has shrunk, which causes unemployment to rise and incomes to fall.

Although it’s nearly impossible to predict the length or severity of recessions, there are some signs that precede them so you can be aware of what’s happening in the economy.

What Happens in a Recession

Here are 10 things that usually happen during recessions

1) The amount of debt people have will not change

This means that the average person won't be able to spend money like they would during boom times. As a result, the economy will slow down and unemployment will rise. During this time, it is important for people not to panic and cut back on their spending. Instead, use this opportunity to invest and save more money for the future.

2) Incomes will decrease

Income will decrease as unemployment rises. Therefore, many people will have less money to spend on goods and services. In addition, inflation often increases during recessions because the demand for goods and services decreases. This means that prices will increase for the same amount of product even though the company is receiving less money from customers.

3) People are going to spend less

When people have less money, they spend less. This means that the demand for goods and services goes down, which causes businesses to cut back on production and lay off workers. As this process continues, there are fewer jobs and even less money for people who are still employed. The recession becomes worse as businesses start filing for bankruptcy and prices go up due to inflation.

4) Tax revenues will drop

We're not going to sugarcoat it—the effects of the recession are far-reaching and will affect every facet of your life. The government has even experienced an $11 trillion loss in revenue, so don't be surprised if taxes start going up on everything from groceries and clothing to electricity. The best course of action is prevention, so take these steps now before the situation gets any worse.

5) People are going to invest less

The stock market will drop. A recession is usually followed by a stock market crash, where the index loses 25% or more of its value from the high before the recession. For example, during the Great Recession of 2008-2009, many stocks lost 80% or more of their value from their high before the recession began.

This happened because investors are less willing to invest when they think there's an economic downturn ahead, and so they sell off stocks that have lost value first.

6) Industries that depend on consumer spending will decline

Industries that depend on consumer spending will decline during recessions. This means less demand for products and services, and fewer jobs for the people who work in these industries. In economic downturns, businesses may have to close or lay off workers as consumers don't have enough money to purchase their goods. In addition, real estate prices are usually one of the first indicators of an economic recession on the horizon - which can lead banks and other lenders to tighten up their lending standards.

7) Demand for goods is going down

Demand for goods is going down because people are less likely to spend money. People will only buy what they absolutely have to, meaning that retailers and manufacturers are seeing lower sales and profits. As a result, businesses will often lay off employees or reduce hours of those who are still employed. There's also more competition for the work that is available, so those who are out of work may find it difficult to get back on their feet.

9) Businesses start laying off workers

With recessions come layoffs. When the economy is struggling, businesses have less revenue and start laying off workers. It's important for employees to be aware of this possibility when they're considering what company they want to work for. If you're laid off, there are several resources available through the state unemployment office.

For instance, you can use your unemployment benefits while looking for a new job and trainings are offered at no charge through many local colleges and universities. The Department of Labor also offers career counseling services that can help individuals find employment opportunities with employers who may not have had layoffs yet but plan on doing so in the near future.

10) New industries emerge during this time

During recessions, new industries often emerge. For example, during the Great Depression, car sales skyrocketed and other consumer-focused industries boomed. People who had previously been too proud or too broke to buy anything suddenly needed something.

As a result, new cars were created and more people could afford them (Ford was an early success), as well as clothes, food, and other necessities that people had previously been unable to afford.

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