MUST WE BE TERRIFIED OF RECESSIONS?

By Craig Erwin, Ph.D.

Recently I have seen lots of articles predicting that the U.S. economy is headed for a recession. A recession occurs when the economy slows for more than a few months. Recessions aren’t much fun. Not only do they frighten people; they cause economic pain for those who lose jobs, or whose businesses fail, or or whose investments plummet in value. Why do so many believe a recession is coming? The stock market has fallen sharply since the year began, consumers are fearful, and the war in Ukraine has jacked up government spending and disrupted global supply chains and food chains. Raging inflation has prompted the Federal Reserve to raise interest rates and promise more hikes, which will make it more expensive for consumers and businesses to borrow. This will slow economic growth as rising interest rates reduce home sales and consumer and corporate spending. Eventually many businesses may stop hiring workers and begin laying them off.

A recession doesn’t sound like much fun, does it? It tends to hit pocketbooks hard. If we’re lucky, we’ll dodge a recession or it will be short-lived. The longer a recession lasts, the greater the toll it takes on households, making it more and more challenging to make ends meet. It even increases divorce rates because job losses and financial problems increase marital strife. If things get bad enough, the recession morphs into a depression, which is even more brutal and lasts even longer. The great depression was devastating for individuals and families in every corner of the country and it lasted a decade. Unemployment rose to 25% and economic growth plunged. The depression’s damaging effects were felt worldwide.

Should we be terrified of recessions? It’s hard not to fear them, but, fortunately, they provide opportunities along with the pain. For investors, recessions have a silver lining; they can make you wealthier. Tumbling stock prices enable investors to buy low, often at lower prices than they’ve seen in years. As a breadwinner, there are plenty of reasons to fear recessions. It’s possible you will lose your job, at least temporarily, since many employers lay workers off during recessions as demand for their products and services sags. Hopefully, if you lose your job, you will be able to collect unemployment. That won’t make you rich, but it should tide you over. An emergency fund can be a lifesaver during recessions, helping you stay afloat until better times return.

Recessions can help build wealth for investors who are fortunate enough to avoid being laid off (although you may not realize it until after the recession ends). If you have a diversified stock or stock and bond portfolio, although its value may tumble during the recession, it should bounce back. If you are smart (and able), you should keep investing during the recession, buying stocks at sale prices. If you do, after your portfolio has recovered it is likely to be worth much more than before the recession.

So, even though the threat of recession terrifies people, many of us weather recessions relatively unscathed if we can keep our jobs. And even though journalists, professional money managers, and investing experts may make it sound as if the world is ending, recessions can benefit us. They can make us richer. We simply need to remain calm and keep saving and investing, just as we did before the recession started.

Are you concerned about the economy? Are your family’s finances healthy? Are you saving and investing regularly?

For more information on recessions, investing, and unemployment, click on the links below: