A recession implies a fall in real GDP. An official definition of a recession is a period of negative economic growth for two consecutive quarters. Recessions are primarily caused by a fall in aggregate demand. This demand side shock could be due to several factors, such as financial crisis, rise in interest rates or fall in asset prices (like houses)
Causes of recession
Demand Side Shock
Factors that can cause a fall in aggregate demand:
Higher interest rates which reduce borrowing and investment
Falling real wages
Falling consumer confidence
Credit crunch which causes a decline in bank lending and therefore lower investment.
A period of deflation. Falling prices often encourage people to delay spending. Also deflation increases the real value of debt causing debtors to be worse off.
Appreciation in exchange rate which makes exports expensive and reduces demand for exports.
Causes Recession of 2008/09
Credit crunch – shortage of finance (Credit Crunch explained)
Falling house prices – related to shortage of mortgages and credit crunch
Cost push inflation squeezing incomes and reducing disposable income
Collapse in confidence of finance sector causing lower confidence amongst ‘real economy’
A recession occurs when there is a fall in economic growth for two consecutive quarters. However if growth is very low there will be increased spare capacity and increased unemployment; people will feel there is a recession. This is sometimes known as a growth recession. see also: Definition of Recessions
If there is a fall in AD then according to Keynesian analysis there will be a fall in Real GDP. The effect on Real GDP depends upon the slope of the AS curve if the economy is close to full capacity lower AD would only cause a small fall in Real GDP.
However in the great depression of 1930s Keynes was very critical of this classical view he said that the long period of negative growth showed that markets do not automatically clear he argued that this was for various reasons.
Wages are sticky downwards, Firms should cut wages to reflect lower prices but in reality workers are very resistant to cuts in nominal wages
If wages were cut in response to unemployment workers would have less spending power therefore AD would continue to fall.
In a recession people have low confidence and therefore spend less. Keynes said this was the “Paradox of Thrift”
Ways to Prepare Yourself for the Next Recession
There is still time for you to prepare, but you have to start learning how to make your own survival foods as soon as humanly possible. The best way to do it is to get the inside scoop on how to do it right. Fortunately, there is a way to get twenty years worth of The Lost Ways. This new food storage system is called The Lost Ways. You do not need a lot of expensive equipment to store foods for a crisis using the methods taught here. Even better, The Lost Ways pays for itself quickly as you begin to put away garden produce or even meats that you buy on sale. For most folks it's simply the biggest bargain of their lives. You can finally become self-sufficient and any extra money saved in food expense goes right back to your pocket. Frankly, at the end of the day, The Lost Ways actually makes you money! What's more, the videos take you by the hand, step by step, through the entire process of "putting away" almost any food you can think of. It's very much like having a food storage professional right there with you every step of the way.
Beef up your bank account
While you’re feeling a little flush is a great time to start socking away some cash. Check your savings balances. Could you live off your savings for six months? A year would be better, advisers say. No savings? Get started:
Even if you’re making minimum wage, you can put some money aside by hoarding gifts and tax refunds.
If you’re working, increase your automatic payroll deductions.
When you’re shopping, use tricks like socking away coupon savings, or rounding up purchase payments to the next whole dollar and saving the difference, or stashing your change when you pay in cash.
Lower your dependency rate
How much of your regular income goes out as fast as it comes in?
Financial adviser Peter Dunn, known as Pete the Planner, urges you to lower your dependency rate on your regular income. While that advice generally goes toward saving for retirement, it applies to recession survival, too, he says.
If you spend more than you earn, you already know that can’t last.
But if you spend 95 percent of your income on a regular basis, Dunn says, then your dependency rate is 95 percent: 95 cents of every dollar coming into your house is vitally important to your solvency, or so you think.
Writing for his column in the Indianapolis Star, Dunn says:
“Your goal is to decrease your rate over time, even in the face of pay increases. Your diligence toward this issue will not only recession-proof your household, but it will also make retirement much easier. … Do the hard work now, and the stress that comes with a recession might never show up.”
If you get a raise, bank the difference between your current take-home pay and the new amount.
Update your resume
No job is recession-proof.
Always be ready to seek a new job.
Keep your resume up to date even if you’re not job hunting now, talent recruiters advise. You never know when you’ll need to send one out quickly. If you keep it current, you’ll be able to customize it quickly for whatever position you seek.
Be sure to highlight concisely your achievements, job titles and a summary of your skills and goals. Be truthful, don’t ramble and make sure you proofread it so it’s error free. See more tips here.
Don’t wait to network until you’re desperate. Businesspeople will sense that you only come around when you want something, career experts say.
“Networking right will constantly reward you with ideas, information and opportunities,” Carlota Zimmerman, the coach known as The Creativity Yenta, told Money Talks News.
Look for groups or events that align with your goals. Check alumni gatherings, industry meetings or even your house of worship, she said.
“You want to put yourself in front of members of your industry who are (at least theoretically) several rungs above you on the corporate ladder, since these are the people who, if impressed, can help you advance your own career goals,” Zimmerman says. Her tips:
Join your alumni associations for college and grad school, and sign up for your next event (even if you despised every person in your dorm).
Go a step further: Join your alumni association board so you can suggest and create events that reflect your industry.
Be careful about what groups you join. Networking events free and open to the public may waste your time. Seek groups that people have to pay something and that take their members, and their time, seriously.
Know what you’re going to say when you’re networking. Prepare and rehearse your “elevator pitch.” You want to deliver such a concise and vivid account of who you are, your experience, what you’re looking for and how you could help your next employer that your talk could be delivered during a 15- to 30-second elevator ride.
Having trouble getting started?
Get a side job
The new marketplace makes it easier than ever to make money on the side. Whether it’s setting yourself up as an Uber driver, starting a dog sitting service or selling goods online, you can find ways to generate extra income.
Many part-time gigs allow for flexible scheduling and work-from-home opportunities, says FlexJobs, which recently posted examples.
Money Talks News has done numerous stories on the topic. A recent selection:
“How to Turn Your Love of Cooking Into Extra Cash“
“20 Clever Ways to Make Extra Money“
“Got the Drive to Make Extra Money? Rent Your Car (or nearly anything) to Strangers“
“Making Extra Money: 7 Steps to Start a Pet Sitting or Dog Walking Business“
“9 Tips to Starting an Online Teaching Business“
“Get Crafty: 7 Steps Anyone Can Use to Make Money Online“
“How to Make Extra Money Buying Locally and Selling Globally“
“Can Ride-Sharing Provide an ‘Uber-Lyft’ to Your Income?“
For more, search here or elsewhere for “side hustle” or “making extra money.”
Avoid scams, such as any jobs that require you to pay them before they pay you.
You can sock away the money you earn, invest it or pay down debt.
Pay down debt
Keeping your debt low and your credit score high will make you more secure and more able to pounce when opportunity knocks, Johnson said.If you’ve got credit card balances, paying them down now will save you hundreds or thousands in interest payments later, plus the money that would go to paying debt will help you get through a downturn.Say you owe $10,000 on a credit card with a typical interest rate of 15 percent APR. Paying $200 a month, about the current minimum payment, will cost you $5,791 in interest over five years, according to a CNN Money calculator.Paying that off now will free up $200 a month. If you put that $200 a month into an investment with even just a 4 percent rate of return, the total you’ll invest over five years ($12,000) will grow to about $13,500.A high credit score can save you money if you do need to borrow. Say you seek a $100,000, 30-year mortgage loan, for example. According to a MyFico.com calculator, a top credit score of 760-850 will get you loan rate of 3.1 percent, monthly payments of $427, and your interest will total about $54,000; a credit score of just 620-639 will get you a loan rate of 4.7 percent, monthly payments of $518, and total interest of more than $86,000. So maintaining a top score saves $32,000 over a poor score.If you need credit restoration help, visit the Money Talks News solutions center. Or see “How to Pay Off $10,000 in Debt Without Breaking a Sweat.”
Track your spending
You need to know where you stand to get where you’re going. Same with your money. It’s easier to reach your financial goals if you know where your money is really going.With money-tracking programs like PowerWallet and similar aggregating apps, you can view all of your accounts in one place — checking, savings, retirement and more. They let you set up budgets and track your spending by category.The apps show you if you’re spending more than you planned on dining out or gas, for example.You can see where you want to cut back spending, or where you have a financial cushion, says PowerWallet. You can also set up alerts for bill payments, when your spending strays from your plan, or when discounts become available for items you’ll really use.
Check your portfolio
When was the last time you adjusted your 401(k) or IRA investments? Do you have too much money in stocks, especially if you’re near retirement?Too many people did during the last downturn, Johnson warns.If you’re in individual stocks, experts offer a range of advice, but you have to weigh your own risk and rewards balance.Keep your eyes on consumer staples. People need to eat, brush their teeth, heat their homes and go to the doctor no matter what the economy is doing.Check your mix of growth stocks and dividend-payers and think about how the companies might withstand a recession. Dividend payers generally did well during the last recession.Many fear restaurants already are in a recession.“Restaurant industry sales tend to be the ‘canary that lays the recessionary egg,’” Stifel analyst Paul Westra wrote in a research report published in July and covered by many financial media outlets.
By the time anyone declares we’re in a recession, we’ll be in one already. That’s one reason it’s good to prepare now.Although a recession often is described as two consecutive quarters of decline in real gross domestic product (GDP), the broadest measure of economic activity, that’s just one indicator. The federal Bureau of Economic Analysis issues GDP estimates quarterly. An initial GDP estimate comes about a month after the end of a quarter; a deeper analysis, in about two months.On Aug. 26, the bureau said real gross domestic product increased at an annual rate of 1.1 percent in the second quarter of 2016. That second-quarter estimate was a slight revision downward from its initial glimpse issued in July, which was 1.2 percent. Still, it’s higher than first-quarter growth, which was 0.8 percent.The official recession caller is a nonprofit, the National Bureau of Economic Research, which uses this definition:“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”Not until Dec. 1, 2008, did the NBER declare what we call the Great Recession actually had begun a year earlier, in December 2007. It didn’t declare until Sept. 20, 2010, that the downturn had ended … 15 months earlier. It hasn’t made any declarations since.Before a recession becomes official, there are plenty of warning signs. Look for growing jobless rates, rising first-time unemployment claims and termination of temporary-help contracts as signs that businesses are cutting expenses — and witnessing less demand for their goods. Other signs include corporations reporting slow or negative earnings growth, a sudden spike in consumer credit spending (especially for covering things like mortgage payments) and people dipping into CDs or 401 (k)s or IRAs for cash.More important than watching for signs, though, is simply getting started preparing for a downturn, which is inevitable. What are you doing?
Here is why:
There now exist a new video course that reveals how to safely prepare and store foods in the event of a dangerous worldwide crisis. It’s designed for anyone who is frustrated with surging grocery prices and the very real possibility of empty shelves during the first year of the new administration.