How Many Recessions Do You Have Left?
Mark Triplett | September 3, 2019
The term recession seems to be gaining a lot of airtime lately. Fears of an economic slowdown seem to be everywhere. Many folks are tuned in to the fearmongering, and allowing it to affect their daily lives.
“Recession” gets tossed around in the media like a radioactive hot potato. The prospects of a recession seem to be sensationalized both in print and television in an attempt to gain your attention. Many folks are tuning in more and more each day listening ever intently for the potential negative news about the economy.
Quiz Question? Why would the news media want to gain your attention anyway?
The term “Recession” seems to evoke negative emotions for many folks including fear, worry, anxiety, or stress. Perhaps you have read or watched a recent news story about the “threat” of a recession and it made you feel concerned.
Should the talk of a recession command so much attention and drive negative feelings? Perhaps, then again, perhaps not.
What Is A Recession?
Merriam-Webster defines a recession as “a period of reduced economic activity.”
Investopedia dives a bit more in detail defining a recession as a macroeconomic term that refers to a significant decline in general economic activity in a designated region typically recognized after two consecutive quarters of economic decline as reflected by GDP in conjunction with monthly indicators like unemployment.
Recessions are officially declared in the United States by a committee of experts at the National Bureau of Economic Research (NBER). They determine the peak and subsequent trough of a business cycle, and thus an officially recorded recession
The NBER’s own website defines a recession as:
” A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”
Many journalists will simplify a recession as two consecutive declining quarters of inflation adjusted (or real) gross domestic product (GDP). However, this can happen even when the NBER would not officially record a recession based on their stated definition.
Wow! That’s four different sources with 4 different definitions. The last of which is often leveraged to sound alarm bells on popular news programs who want to get your attention.
Quiz Question Answer: They can increase viewership and sell more advertisement time on their channel!
How Often Do They Occur?
Historically there have been 14 recessions since the beginning of the 20th century. That may lead one to think that a recession is do every 8.57 years or so. However, there have been condensed periods of recessionary activity as well as extended periods without a recession.
For example, there were 4 recessions occurring between 1945 through 1960 averaging a recession every 3.75 years. There was also a recession in 1980 followed by another one two years later in 1982.
On the other hand, there have been periods of time in which more than decade elapsed between recorded recessions. Albeit fewer occurrence, longer periods of economic growth are historically recorded and it’s not unlikely to occur in the future.
However, in recent history a recession has been recorded 6 times in the past 50 years. Therefore, you’ll often hear pundits on TV state that a recession is a likely occurrence about every decade or so, and if we get beyond 10 years of economic expansion without a recession fears are heightened.
How Long Do They Last?
With a few exceptions such as the Great Depression in which the economy was in a recession from 1929 until 1938, most recessions are often short-lived events relative to history. They are not nearly as scary when viewed through a broader lens, and can actually be viewed as healthy events allowing for further economic expansion to continue.
Many of the recessions recorded during the last 50 years lasted less than 12 months, with a few lasting a few months longer. Even the Great Recession, the worst financial crisis since the Great Depression in 1929, lasted only 19 months in length.
How Many Recessions Are You Likely to Experience?
For many folks, it is foreseeable that they will experience at least 7 recessions during their working adult life time. If you started working in your 20’s and are near retirement in your early to mid 60’s you have likely experienced 6 officially recorded recessions already.
Some may be more memorable to you than others. For example, those reading this article likely remember how they were affected by 2008. Why is the 2008 recession perhaps more memorable beside the fact it was the most recent and historically the worst since the Great Depression?
For many folks in their early to mid 60’s, their retirement accounts in 2007 were the largest to date at that time than they had ever been during their working years. Therefore, the impact of the recession, and subsequent impact on their investments, was more significantly felt than perhaps previous recessions when their retirement savings accounts were small or non-existent.
For those currently transitioning into retirement, it is foreseeable that they will experience another 2 or 3 recessions during their lifetime. Navigating these likely events doesn’t have to be scary or evoke negative emotions if they are properly prepared to deal with the inevitable.
Does It Mean Certain Doom for Retirement?
As you can see, recessions are naturally occurring as part of a business cycle. Expansion is a natural state of a healthy economy, but at times the expansion may slow down, or even retract a bit. The slowing of the economy in large part is what defines a recession. Investment market meltdowns are not part of the criteria for declaring a recession. However, they may be a result.
The slowing of an economy may trigger alarm bells of a recession even when the fundamentals of the economy are still strong.
For example, we’ve seen fantastic economic expansion in second half of 2017 with GDP exceeding 4% in the 4th Quarter. of 2017. Then 2018 started off slower at only 2.5% in the first Quarter, but then rising to 3.5% in the 2nd Quarter. From there, the next two quarters were lower at 2.9% in the 3rd, and 1.1% by the 4th Quarter.
Wait, two consecutive quarters of slower real GDP. Was that a recession? Maybe, maybe not depending on who’s definition you subscribe to.
Meanwhile, the fundamentals of the economy seem to be strong and intact. Companies are still reporting positive earnings each quarter. The majority are making money, and are profitable. Unemployment is at historical low levels. Capital to start, run, and grow a business is relatively low cost and accessible. Consumers are spending money. These are all positive signs.
Well capitalized companies with little debt can fair quite well during a recession. Companies that make things that people want or need to buy also seem to do well.
Should I Panic When the Media Sounds the Recession Alarm?
What you see on TV or read in the paper usually has some truth to the matter. However, consumer beware. The media outlets want your attention, readership, or viewership more than anything else. If everything is perfect, and the world is doing just fine you are less likely to watch or read their content. This results in less ad revenue because fewer people are paying attention.
Should you really be concerned when you hear the recession alarm bells in the media? I suppose it depends on how you have prepared.
Ask yourself these questions.
- How much of my desired lifestyle is funded with lifetime income such as Social Security, pension, or other lifetime annuity income?
- Are my investments in stocks or bonds aligned with my long-term goals with no need to sell them for at least 10 years or longer?
- Do I have adequate access to cash to supplement my income in the next 24 months?
- Will I be forced to make a choice between selling investments at a loss or reducing my lifestyle during stock or bond market downturn?
- Have I positioned adequate retirement assets in places immune to stock or bond market losses so that I can maintain my lifestyle with supplemental income over a 3 to 10-year period when necessary?
Depending on your answers, you may have little or no concern as to when the next recession occurs because your lifestyle will likely be unimpacted.
On the other hand, if you are not adequately prepared to live through periods of economic slowing or contraction and potential market downturns that could result there could be cause for concern.
Proper planning, and execution of a long-term strategy can build confidence, and help to eliminate the noisy media.
Chances are you are going to experience a recession or two throughout your retirement. Historically they will be short-lived and followed by further economic expansion. These are naturally occurring events within a business cycle.
The question you might ask yourself is whether you will participate with fear and anxiety, or whether you will confidently shrug it off as part of your long term written retirement plan.