The R Word

Let's talk about the R-word, shall we?

RECESSION

What is it, and is it as bad as some people make it out to be? Let's start by defining the word.

A recession is a general decline in economic activity. It is typically defined as two consecutive quarters of negative economic growth, measured by a country's gross domestic product (GDP). Let's break that down a little bit. A financial quarter is defined as 3 months. GDP is the total value of all final goods and services produced within a country in a given period. So if we look at our definition of recession again, it's 6 months of a declining value of goods and services.

So let's say we own a shoe store, and we've been killing it for the last 12 months. Shoe sales have increased every quarter, and we've made more money. But these past six months, sales have been down both times. In this case, our store has hit a recession.

So why does this happen? Recessions happen when there is a widespread drop in spending by consumers, businesses, and governments. This decrease in spending leads to lower production and increased unemployment. Recessions are caused by various factors, but most typically, it is a combination of too much debt and not enough demand. When individuals, businesses, and governments borrow too much money, it can increase interest rates and inflation.

Remember that saying "every action has an equal and opposite reaction"? Well, let's look back on the past two years. To stimulate the economy during the early parts of the pandemic, the government printed money, a LOT of money. Add to that the interest rates were meager, and you get individuals and businesses borrowing too much money, which leads to inflation. Which is one of the causes of a recession.

The other thing to mention when talking about this is that it's also a part of the business cycle. ( We'll dive into the details of that in another post). Simply put, things go up, and then things come down. Before 2020 our economy had been going since 2009. Safe to say, we were due for a period of slow down.

A recession can be a challenging time for everyone involved. Businesses suffer as consumers spend less money, leading to lower production and increased unemployment. This can have a ripple effect on the economy, causing a decrease in GDP. Governments often try to combat recessions by implementing stimulus packages, but these are not always successful. The thing to remember now is to be mindful of your money. Make sure you have your spending under control. Do your best not to take on any new debt, as with interest rates rising, it will become more expensive to borrow that money, which means it will take longer to pay it back. Don't give in to the fear that many people will be posting, and you'll even see it on the news. Yes, we are heading for a different economic cycle, but this has happened before and will happen again. Look for facts, not just opinions, and if you have questions, feel free to reach out and ask.

Here are some links to more information about recessions. I encourage you to check them out to help better understand this topic; of course, I'm here if you need me.