An economic recession sends ripple effects across the economy. Although everyone feels the effects, most can only wait for sunnier economic times to appear. Knowing how long a recession can last can help you weather the storm.A financial advisorcan guide you in making smart investment moves for your portfolio in a recession.
What Is a Recession?
A recession is a serious economic downturn that lasts for more than a few months. Generally, an economic downturn isn’t considered a recession until the economy has seen negative growth for at least two quarters. Economic growth is measured by gross domestic product (GDP).
You might see a rising unemployment rate or falling stock prices during a recession. Investors have fewer funds on hand to invest and often lack the necessary confidence to invest in the market.
One important indicator that acts as a warning sign for a recession includes an inverted yield curve. In this case, the long-term government bond yield is lower than the short-term government bond yield. This inversion indicates a lack of faith in the economic times. Since 1970, an inverted yield curve has happened before every U.S. recession.
A few other indicators include closing businesses and stock market contractions.
How Long Do Recessions Last?
According to the National Bureau of Economic Research (NBER), the average length of recessions since World War II has been approximately 11 months.
But the exact length of a recession is difficult to predict.In general, a recession lasts anywhere from six to 18 months.
For example, the Great Recession that started in December 2007 lasted 18 months. But the recession prompted by the pandemic in 2020 only lasted two months. When a recession is on the horizon, it’s impossible to know how long it will last.
When Does a Recession Become a Depression?
The length of a recession varies. But where’s the line between a recession and a depression?
In general, a depression is an economic downturn that lasts longer than expected or has extremely severe consequences. But there’s not a technical definition that distinguishes a depression from a recession.
For example, the Great Depression and Great Recession both made names for themselves. But the negative impacts of the Great Depression were much larger than the impacts of the Great Recession. That’s because the Great Depression lasted 10 years! That’s significantly longer than any recession on the books.
How to Prepare for a Recession
In an extended downturn, almost every household feels the pinch of a tighter budget. Financial security can be lost in the wake of unemployment spikes and plummeting retirement savings. But the reality is that recessions are part of the business cycle. Instead of hoping one never comes, preparing for a recession is better.Here are four common strategies to prepare for a recession:
Have an emergency fund.Rising unemployment is a hallmark of most recessions. If possible, build an emergency fund to cushion the financial fallout in case of a layoff. Most experts recommend saving between three to twelve months of expenses. But the right amount varies based on your risk tolerance and income stability.
Consider your risk tolerance.The right investment portfolio carefully considers your risk tolerance. Since heavy losses are likely during a recession, you need to be able to stay the course.
Invest in alternative assets.If you don’t want to have all of your eggs in the stock market, then look at other options. Real estate and precious metals are a few potential investment options to consider.
Don’t panic sell.If you have a portfolio of assets, don’t panic. Although tempting to sell off your assets at the beginning of a recession, it’s often better to stay the course. Jumping in and out of the marketin an attempt to time the market often leads to lower returns over the long term.
Bottom Line
If you are investing with a recession on the horizon, don’t panic. The good news is that recessions are part of a normal economic cycle. It’s likely that the economy will pull out of a recession within a year. But staying financially comfortable during tumultuous times can be a challenge. A financial advisor can help you navigate a changing economy with your long-term goals in mind.
Investment Planning Tips
- A financial advisor can help you make smart investment moves for your portfolio. SmartAsset’s free tool matches you with up to three financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A recession can test your risk tolerance limits. Determine the appropriate asset allocation strategy for your risk tolerance before a recession hits. Take a look at our free asset allocation calculator to consider optimal portfolio strategies.
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FAQs
In general, a recession lasts anywhere from six to 18 months.
How long do recessions generally last? ›
3. How long do recessions last? The good news is that recessions generally haven't lasted very long. Our analysis of 11 cycles since 1950 shows that recessions have persisted between two and 18 months, with the average spanning about 10 months.
How many years does it take to recover from recession? ›
“Recover” is a term that is a bit fuzzy. After a year, the IMF definition of a recession said that the recession was over. But a recovery happened over another several years, and beginning in 2017, jobs, stock prices, and earnings shot up. That was 8 years later.
How long does it take to get past a recession? ›
Historically, recessions have lasted anywhere from two months to several years, according to the National Bureau of Economic Research. But our current economic climate presents unique circ*mstances that make it difficult to draw a direct comparison with past events.
Is a recession expected in 2024? ›
Economists predict another year of slow growth around the world in 2024. While the risk of a global recession is lower in the year ahead, two G7 economies dipped into recession at the end of 2023.
What was the longest recession in history? ›
What was the longest recession in history? The longest recession in U.S. history was the Long Depression, which began in 1873. It was a series of recessions that lasted for more than five years and was caused by the U.S. financial markets' inability to keep pace with industrialization and monetary policies.
How long did the 2008 recession last? ›
December 2007–June 2009. Lasting from December 2007 to June 2009, this economic downturn was the longest since World War II. The Great Recession began in December 2007 and ended in June 2009, which makes it the longest recession since World War II.
How long does a recession have to last to become a depression? ›
A depression is a dramatic and sustained downturn in economic activity, with symptoms including a sharp fall in economic growth, employment, and production. A depression can be defined as a recession that lasts longer than three years or that results in a decline of at least 10% in annual GDP.
How to make money during a recession? ›
Many investors turn to stocks in companies that sell consumer staples like health care, food and beverages, and personal hygiene products. These businesses typically remain profitable during recessions and their share prices tend to better resist stock market sell-offs.
How does a recession end? ›
A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” Consistent with this definition, the Committee focuses on a comprehensive set of measures—including not only GDP, but also employment, income, sales, and industrial production—to analyze the trends in economic ...
What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
How will the US economy be in 5 years? ›
While we do not forecast a recession in 2024, we do expect consumer spending growth to cool and for overall GDP growth to slow to under 1% over Q2 and Q3 2024. Thereafter, inflation and interest rates should gradually normalize and quarterly annualized GDP growth should converge toward its potential of near 2% in 2025.
Are we in a depression right now? ›
“The American economy is not in a silent depression. It's not even in a depression at all,” House said. “When we came into 2023, many economists thought we might slide into a recession over the course of the year, but growth in goods and services and in trade have all remained far stronger than we anticipated.”
Will there be a recession in 2025 in the USA? ›
Fears of an economic recession may have to be pushed back to 2025, according to JPMorgan. US factory activity expanded in March for the first time since September 2022. JPMorgan said the rebound in manufacturing activity bodes well for continued economic resilience.
What are economists saying about 2024? ›
A panel of economists expect this year to be characterized by faster growth, shrinking inflation and healthy job creation — a far cry from the widespread fears of a recession that marked 2023.
How to prepare for a recession 2024? ›
How to prepare yourself for a recession
- Reassess your budget every month. ...
- Contribute more toward your emergency fund. ...
- Focus on paying off high-interest debt accounts. ...
- Keep up with your usual contributions. ...
- Evaluate your investment choices. ...
- Build up skills on your resume. ...
- Brainstorm innovative ways to make extra cash.
A depression is a dramatic and sustained downturn in economic activity, with symptoms including a sharp fall in economic growth, employment, and production. A depression can be defined as a recession that lasts longer than three years or that results in a decline of at least 10% in annual GDP.
When was the last time the US was in a recession? ›
The COVID-19 recession was the shortest on record, while the Great Recession of 2007-2009 was the deepest since the downturn in 1937-1938.
