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Financial News

Jun 9, 2020

What It Means When We’re in a Recession

By Jeremy Quittner

GDP is shrinking, businesses are shuttered, but stocks have nearly recovered.

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The U.S. is officially in a recession.

That’s according to the National Bureau of Economic Research (NBER), a non-profit research group, which says the country’s economy officially stopped growing in February, 2020, just before the massive business shutdowns caused by the Covid-19 pandemic. February’s negative growth put an end to a 128-month economic expansion, the country’ s longest on record.

News of a recession may not come as a surprise, given that unemployment soared to nearly 15% in April, with approximately 20 million people losing their jobs–the biggest increase in jobless numbers since the Great Depression. (In February, 2020 the unemployment rate was about 3.5%.)

In response, Congress approved various stimulus packages, including nearly $3 trillion of emergency spending. The largest part of the stimulus includes the $2.2 trillion CARES Act, which gave most people $1,200 relief checks . Congress has also approved hundreds of billions of aid aimed at helping small businesses

Meanwhile, U.S. gross domestic product (GDP), a measure of economic output, shrank by 5% in the first quarter of 2020, according to the U.S. Department of Commerce. The World Bank estimates that the global economy will shrink by 5.2% for the full year 2020.

While the economy may be mired in recession, stock market indices such as the S&P 500 have nearly recovered their losses from steep sell-offs, which started in March

The coronavirus pandemic started in December, 2019 in Wuhan, China. It has sickened millions of people and killed hundreds of thousands globally.

What’s a recession?

A recession is an extended period of economic contraction. It’s often said that a recession occurs when the economy experiences two consecutive quarters—or six —of negative GDP growth. In other words, the economy isn’t growing, but shrinking. Other financial experts define a recession as a period of negative growth lasting for several months

Shifting market indicators such as rising unemployment, falling GDP, and lower consumer spending, can signal an economic downturn, or a budding recession.

While the stock market typically falls during recessions, the market activity doesn’t necessarily determine whether or not the economy is in a recession. Because recessions are classified by economic growth, it’s possible to have markets trend upward while the economy is still in a recession.

Market downturns can lead to recessions, however. For example, a market downturn can cause significant decreases in capital, or money, available to both consumers and companies. As a result, companies may lay off workers, who will then have less money to spend, save, and invest.

Find out more about recessions here.

Consider staying the course

Recessions are part of larger business cycles—the economy experiences periods of expansion and contraction. For investors, that means that they’re simply a part of life, and that there’s no avoiding them.
So, what should you consider doing when a recession hits? Stash recommends staying the course—diversify your portfolio, continue investing regularly, and invest for the long-term. Also consider building a budget, and saving regularly.

Jeremy Quittner is the editorial director for Stash.


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