Recessions: what they are and how to prepare

A recession is technically defined in the US by the National Bureau of Economic Research (NBER) as a significant decline in economic activity across the economy lasting more than a few months. The informal definition — 'two consecutive quarters of negative GDP growth' — is a decent approximation that gets close to what the NBER decides.

What happens in a recession

• Unemployment rises, often sharply.
• Consumer spending slows as people pull back.
• Corporate profits decline.
• The stock market usually falls, often leading the recession by several months.
• The Fed typically cuts interest rates to stimulate recovery.
• Recovery eventually happens — every US recession has been followed by expansion, without exception.

Warning indicators

• Inverted yield curve (short-term bond rates higher than long-term). Not perfect, but has preceded most modern US recessions.
• Rising unemployment trend, especially if it crosses the Sahm Rule threshold (~0.5% rise in the 3-month average).
• Credit conditions tightening — harder to get loans, higher default rates.
• Consumer confidence indexes dropping.

Preparing your own finances

1. Build your emergency fund larger than usual. 6–12 months instead of 3–6 is reasonable during uncertain periods.
2. Pay down high-interest debt aggressively. Debt becomes harder to service if income drops.
3. Diversify your income if possible. Multiple small streams are more recession-resistant than one big one.
4. Don't panic-sell investments. Historically the worst thing to do in a recession is sell stocks at the bottom.
5. Keep investing regularly. Recessions are when cheap shares get bought. DCA continues as normal.