In their hit song “I Want It That Way,” the Backstreet Boys croon about how they want things to be perfect. Unfortunately, in life – and in business – there is no such thing as perfection. Although it’s impossible to predict everything that will happen during a recession, by being prepared you can minimize its negative effects on your bottom line. This guide will teach you what to expect and how to protect your business while the economy takes a nosedive. Let’s get started!
What Would Happen if We Went into a Recession?
The first thing you need to know about a recession is that it’s not caused by one event. It’s the result of many different factors coming together, like high unemployment, low consumer confidence, and decreased spending. When these things happen, they put a strain on businesses of all sizes.
- READ MORE: 19 Recession-Proof Businesses
Stages of a Recession
The economy goes through cycles, and a recession is just one part of that. Being aware of how these cycles work can help you weather the storm and come out on the other side stronger than before. There are five stages of a recession, which we’ll discuss below.
Recession
This is the first stage, and it’s characterized by a decrease in activity throughout the economy. This can manifest itself in different ways, like lower production levels, fewer jobs, and less spending by consumers and businesses.
Trough
The second stage of a recession is the trough. This is when the economy reaches its lowest point and starts to turn around. This is often marked by an increase in unemployment, as people who have been laid off start to look for new jobs.
Recovery
The third stage is the recovery, when the economy starts to grow again. This is usually a slow process, with businesses and consumers gradually increasing their spending.
Expansion
The fourth stage is expansion, when the economy is growing at a healthy rate. This is when businesses are thriving, new jobs are being created, and people are feeling confident about the future.
Peak
The fifth and final stage is the peak, occurring when the economy reaches its highest point. This phase is typically succeeded by a recession, as the economy begins to decelerate. Consequently, this cycle continues to repeat itself indefinitely.
READ MORE: How to Prepare for a Recession: Your Complete Guide
What Happens in a Recession?
The economic cycle is a natural phenomenon, and there’s nothing we can do to stop it. However, there are things we can do to prepare for a recession, which is when there is negative GDP (gross domestic product) growth for at least two consecutive quarters.
The National Bureau of Economic Research (NBER) defines a recession as “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.” Here are six key aspects of what happens during a recession:
Economic Slowdown
The first thing that happens during a recession is the economy slows down. This means that businesses are producing less, and consumer spending is down. This can lead to layoffs as businesses try to cut costs. During this time, there was a significant decline in the demand for goods and services.
Stock Market Decline
The second occurrence is a decline in the stock market. This situation arises when the value of stocks decreases, leading to financial losses for investors. As a result, many people experience anxiety over their investments. Nevertheless, this can also be an excellent opportunity to invest in the stock market, as it allows you to purchase stocks at a lower price.
Economic Growth
A growing economy is the third occurrence. It refers to the phase when the economy begins to recover after a decline. This process is typically gradual, with businesses and consumers slowly ramping up their spending.
Rising Interest Rates
The fourth thing that happened was that the Federal Reserve raised interest rates to try to slow down the economy. Raising interest rates can make it more difficult for businesses to borrow money and can also lead to inflation.
Rising Unemployment
The fifth thing that happens is unemployment rises. This is when people lose their jobs, as businesses try to cut costs. This can be a very difficult time for families, as they try to make ends meet.
Inflation
The sixth and final thing that happens is inflation. This is when prices go up, and people’s incomes don’t keep pace. This can be a problem for businesses as they try to maintain their profit margins.
- READ MORE: What is a Recession?
What’s Happened During Past Recessions?
There have been 13 economic recessions since the Great Depression. They’ve usually been caused by things like wars, oil shocks, or financial crises. Recessions can be difficult times for businesses and consumers alike. But they’re also a natural part of economic cycles, and they eventually come to an end. Let’s take a look at two recent recessions in our country’s history:
The Great Recession
The Great Recession saw a significant decline in activity throughout the economy over a period of time. According to economic research, the recession was caused by a combination of factors, including the bursting of the housing bubble, easy credit conditions, and high oil prices. This was one of the worst recessions since the Great Depression. Many people lost their jobs and homes, and the stock market experienced a significant drop. Understanding what happens during a recession is crucial for analyzing its impact.
World War 2 Recession
World War II brought about a sharp decrease in economic activity. This was due in part to the fact that many countries were focused on funding the war effort and also because of the disruption caused by the conflict. After the war ended, the global economy experienced a period of rapid growth known as the postwar boom.
RELATED VIDEO:
Make Sure Your Small Business is Prepared
No one enjoys contemplating the prospect of a recession, but for small business owners, being prepared is essential. The initial step is to thoroughly assess your financial situation. Do you have sufficient cash reserves to endure a few months of reduced sales?
It’s also important to understand the business cycle and how it might affect your industry. While there’s no guarantee that your business will survive the next recession, taking the proper precautions can give you a better chance of weathering the storm.
READ MORE:
Image: Envato Elements
