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- Does a Recession Even Matter?
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Today we’ll be discussing how a recession could affect your personal finances.
In particular, how recessions affect people differently depending on everything from how you earn a living to where you live.
Let’s dive in.
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A few days ago I heard a podcast interview where a macro-economics guy was saying how seven states in the US are already in a recession (which in this case would be defined as a given state experiencing one or more quarters of negative growth).
Then, a matter of hours ago, a brand new survey was published showing a stunning 60% of Americans believe the US is already in a recession.
Whether we're in one or heading toward one doesn't matter.
Because if you believe in the "Pray for the best, prepare for the worst." philosophy, there are more negatives signs than there are positive ones.
So how should you prepare?
Understand recessions affect people in different in ways. On a broad level, a downturn could affect your finances one of three ways:
Hurt / negative impact
Neutral / no impact
Benefit / positive impact
So the question becomes: Which category do you fall into?
And once you know which category you're in, what steps should you take?
First, if you work a 9-5 job and are not fired, it's likely the recession won't affect your finances one single iota.
As an example, I graduated college in 2007, right before the Great Financial Crisis / Great Recession started. But because I had a good, high paying job - and because I wasn't paying attention to the economy - I had no idea we were in a recession.
In fact, 2009 was one of the highest earning years of my life.
I give this example because people fear the word recession without considering whether an economic downturn will even affect them.
Source: St Louis Fed
And because of that, you should build an emergency fund and do whatever you possibly can to avoid being fired. Further, if you're worried about being laid off, the time to start looking for another job is now.
On the flip side, if you keep your job, a recession can actually be a good thing.
Why?
Because prices are largely driven by Supply and Demand. And generally speaking, economic pain reduces demand for both products and services.
Meaning, if your personal finances are in order despite what's going on around you, recessions can be a great time to get decreased pricing on big ticket purchases. Examples include:
Home remodeling / improvements
Boats / antique cars / exotic cars
Luxury watches / jewelry
Home prices in general
As an example, luxury watch prices have cratered almost 40% from their 2022 peak (per the image below). And given the general direction the economy is headed, it's likely that number will keep trending down.
Source: Forbes
So if you have a steady job and have been wanting to make a big ticket purchase, holding off for another six months could save you 4-5 figures.
With that said, some people will be negatively affected by a downturn.
Some of the most obvious examples include:
Anyone who's laid off (duh)
Gig workers
Marketing agency owners
Small business owners in recession sensitive industries
Employees working at companies in recession sensitive industries
The most obvious (and potentially most disastrous) scenario is being laid off without having any kind of emergency savings built up.
While unemployment is a life raft, it can take 4-6 weeks before you get the first check. And in most cases, whatever aid you get will be a mere fraction of what you earned at your job.
So like we said above, take precautions if you're at risk of being fired.
Second, gig workers (who already suffer from inconsistent incomes) and agency owners will be negatively affected. Why?
Academic studies show marketing is one of the first expenses businesses cut during a recession (however unwise that decision may be).
Meaning, if you provide marketing services as a freelancer, run a marketing agency, or are employed by one, recessions represent an above-average threat level to your income.
And because of that, you should take precautions if you work in one of the above three roles.
As for running / working for a company in a recession sensitive industry, you have to understand some purchase are more negotiable than others.
While Jimmy Choo shoes can wait, getting your taxes done can't.
Same goes for prioritizing your cell phone bill over buying imported, grass fed octopus for your three month old Pithuahua.
Like we discussed in our Recession Proof Business Models issue, the first things the middle and upper class cut back on during economic downturns are unnecessary indulgences.
Sure, what the upper class considers an "indulgence" varies widely compared to the middle class.
But either way, if what you're selling (or what your employer sells) is a Nice To Have, but not a Must Have, a recession could put you at risk.
Next, while there aren't a whole lot of job roles where employees should expect a pay raise because of a recession, some businesses benefit from downturns.
In particular, companies that sell at the lower end of the pricing spectrum can experience an increase in demand as consumers hunt for bargains.
With that said, launching a new business during a recession (let alone depression) can be tough if you're not a veteran entrepreneur.
So if you're already running a company that sells something in the Nice to Have category, you may be better off adding a product or service line that is more affordable and/or falls into the Must Have... category (versus launching an entirely new, but more recession friendly business).
Last, understand some recessions are more brutal than others.
As an example, there was a lightweight recession from July of 1990 to May of 1991 that - for the most part - people didn't even notice.
On the flip side, the 2007 to 2009 downturn was so dramatic - and had such a large global impact - it's referred to as the Great Recession (mimicking the language of the Great Depression).
So, while media headlines can be scary, understand recessions are a normal part of the business cycle and can pass as quickly as they arrive.
💡 Takeaway: While the prospect of recession is scary, economic downturns affect people differently. So rather fall into a media headline induced panic, analyze your situation to determine if a recession will affect you positively, negatively or not at all.
🎁 Resources:
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