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 usually 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 long does it take to recover from a recession on average? ›
A typical recession persists for about a year, while an expansion often lasts more than 5 years. Recoveries from recessions are strong, reflecting the presence of a bounce-back effect.
Is a recession likely 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.
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.
What was the longest recession in history? ›
The Long Depression was, by a large margin, the longest-lasting recession in U.S. history. It began in the U.S. with the Panic of 1873, and lasted for over five years.
What industries thrive in a recession? ›
There are also fundamental services that consumers can't do without, even in hard times.
- Accountants. ...
- Healthcare Providers. ...
- Financial Advisors and Economists. ...
- Auto Repair and Maintenance. ...
- Home Maintenance Stores. ...
- Home Staging Experts. ...
- Rental Agents and Property Management Companies. ...
- Grocery Stores.
The bounce-back from the 2008 crash took five and a half years, but an additional half year to regain your purchasing power.
How long is a recession before it becomes 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 much money do I need to survive a recession? ›
Highlights: A recession is a period of economic downturn spread across several months or years. To help prepare for a recession, job loss or other financial hurdle, aim to build an emergency fund that covers three to six months of living expenses.
The economic data should “give more confidence that the US economy is recovering in additional sectors and recession fears for 2024 are likely to be pushed into 2025”, it noted. This means that if there was a potential recession it is pushed back to 2025 because of the solid manufacturing data.
How will the US economy be in 5 years? ›
Overall, despite an expected slowdown in the coming quarters, we expect the US economy to post real growth of 2.4% this year and 1.4% in 2025. Over the entire forecast, economic growth averages 1.8% per year, slightly higher than the long-term potential of 1.5% per year.
Are we heading for a depression? ›
Even with tumultuous events last year, such as the failure of three U.S. banks, the nation has not tipped into recession — and certainly not a depression, either. A depression is an extended economic breakdown, and we have not seen signs of that kind of pain. (See recession vs. depression.)
What was the worst recession in history? ›
The 2009 global recession, also known as the Great Recession, was by far the worst of the four postwar recessions, both in terms of the number of countries affected and the decline in real World GDP per capita.
What ends a recession? ›
The official end of a recession is when the economy starts growing again, but this doesn't necessarily mean that the market is back to normal. Many economists believe a recession isn't finished until the economy approaches its pre-recession GDP and unemployment levels.
When was the US economy at its worst? ›
In the United States, the Great Recession was a severe financial crisis combined with a deep recession. While the recession officially lasted from December 2007 to June 2009, it took many years for the economy to recover to pre-crisis levels of employment and output.
What gets cheaper during a recession? ›
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
How long do real estate recessions last? ›
How long do housing market downturns last and how do they end? According to data from the National Bureau of Economic Research (NBER) going back to 1854, an average recession lasts about 17 months.
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 stocks did well during the 2008 recession? ›
Contrary to investor expectations, several growth stocks including Apple Inc. (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN), and Netflix Inc. (NASDAQ:NFLX) grew during the 2008 recession, so investors don't have to ignore growth stocks to be conservative.
