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Is recession coming? Non-technical guide to recessions and how to survive one [2020]

recession definition

Is recession coming?

The objective of this article is to address aspects of recession, not just what it is but what to do if you are impacted by it.  

Some of these lessons come from our own lives as we lived through the last great recession of 2008.  We hope you find the information useful.

If you would like to add some pointers for others’ benefit, please let us know.

Recession 2020

What is a recession and how is it different from depression?

recession vs depressionUps and downs are a normal occurrence in any business cycle.  

When the entire economy faces a decline in Gross Domestic Product (GDP) for two consecutive quarters, then we are said to be in a recession.

Depression on the other hand is a deeper and longer recession that goes on for 3 years or more.   

For context, since the Great Depression of 1929-1933, we have had over 13 recessions including the great recession of 2007-2009.

Recessions are a more common part of economic cycles.  

What makes this COVID recession different?

covid recessionUnlike the previous recessions, the slowdown of the economy is not related to soundness of the businesses or the fundamentals of our financials.

This recession is a biological one.

That means, we know exactly what caused it and what will end it. 

For instance, the majority of the jobs that are currently on hold or lost will return to the market once we find a cure for COVID.

As long as the governments continue to keep the businesses afloat until normalcy is returned, a major portion of these jobs will return when the economy kick starts.

We will experience bumpiness along the way until we find the cure, however, we should largely come out at the other end of this with minimal damage assuming a vaccine will come out by Q1 2021.

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Shape of recession

A shape is assigned to the recession based on how long they last.  

V shaped recession

When recession lasts from a few months to under a year then it is considered to be a V shaped recession.  V shaped recessions are notorious for flash crashes and surprising rebounds.

Those prepared with short-term cash supply could land on great trades in a V shaped recession.

U shaped recession

When a recession lasts for a year to two years then it is considered a U shaped recession.  U shaped recession tends to have lingering effects on real estate and investment aspects for up to 2 years.

U shaped recessions provide great opportunities to invest in real estate and high value companies at a deep discount.

L shaped recession

L shaped recessions are mini depressions, just that they don’t last as long as a depression does.  L shaped recessions typically last 3 years and up.  

Sometimes, the damage caused by L shaped recessions could have lingering effects for 5 years to a decade.

L shaped recessions scar investors with bad experiences and thus discourage investments for a long time even after the recession has ended.

For those with sufficient liquidity, L shaped recessions could offer once-in-a-lifetime opportunity to invest in high yield assets.

What happens during a recession?

Each recession is different depending on what caused it.

Here is what happened in each of the recessions since the last Great Depression. 

TitleYearCausing FactorDecline in GDPUnemployment
The Great Recession2007-2009 Subprime Mortgage and banking crisis4.3%10%
Dot-com Recession2001Over-inflation of tech stocks0.60%5.50%
Gulf War recession1990-1991Iraq invasion on Kuwait spiking oil prices around the world1.10%7%
Energy Crisis recession1981-1982Unmanageable inflation3%10.80%
1980 Recession1980Unmanageable inflation2%7.80%
Oil embargo recession1973-1975Spike in oil prices due to OPEC embargo3.40%9%
Recession of 19691969-1970Tighter monetary policies, cut down on government spending1%6%
Recession of 19601960-1961Rise in interest rates by the Fed Reserve2%6.90%
Recession of 19571957-1958Increase in prices due to increase in interest rates by Fed Reserve3.70%7.40%
Post Korean War recession1953-1954Cut in government spending2.20%6%
Post-WWII slump1948-1949Post war impact2%7.90%
Post WWII recession1945Cut in government spending1.90%11%
The Roosevelt Recession1937-193810%20%

As you can see, while each recession is caused by different factors, the bottom line impact is slower economic progress, spike in unemployment rate and a drop in GDP.

How does a recession impact us?

recission 2019Recessions cause loss in revenue and this puts businesses on back foot.

Many companies pull back on their investment and expansion plans which thwarts the capital movement.

Companies go on a conservative mode which means they don’t hire new people and will resort to cost cutting measures like laying off people.

Here are the things that happen during recession that impact us:

  • Job loss
  • Lack of general sense of optimism
  • Lack of consumer spending
  • Reduced investment activities
  • Reduction in investment in startups 
  • Reduced real estate values
  • Reduced liquidity across all segments of society

All of these impacts are self-explanatory and they increase the effects of recession like a self-fulfilling prophecy.

Strategies to cope with a recession

how to overcome recission

There are strategies one could adopt that can help alleviate the brunt of a recession on personal financial situations.

These strategies are sound disciplines in general but they come very handy when facing a recession.

Diversification of portfolio

We have written an entire article on how to keep investments diversified.  

In essence,  having exposure to short, medium and long term assets is very important.

This way you don’t starve during recession while making sure you are being smart about the future.

You can read the entire article here: Where to invest during a recession?  

Downsize your lifestyle

Does your family need a 6 bed home? 

I have talked to many folks who are slaving their life away to ‘keep up the appearances’.

Many have given me answers that sounded ridiculous to me.  One such answer is ‘those 

two bed rooms are for guests but for now we are using them for storage.’

That is a damn expensive storage for crap that you don’t even know you have (or will ever use).

If your family is large enough to justify the big homes then its fine. 

But see if you are paying a hefty price to keep up the appearances only to realize that no one really gives a fck.

Most people who you were afraid to be judged by will not come to your rescue when you need help.

Stay true to what pleases you, your family and your budget, not what pleases others.

Moving to another State or country

Trees cannot move. They spread their roots as far as they can to find the water and nutrients it needs to grow.

If there is no water and nutrients, they dry and die.  They have no choice.

The biggest perk of being human is that we can move to greener pastures.

When everything seems to be working against you, take a step back and ask yourself honestly – is it time to move?

Moving to a new location has few benefits:

  • Cost of living

You have a choice to move to a lower cost location. During the pandemic – people are abandoning high cost locations like New York and California.

They are leaving the glory of NY and CA for the comfort and savings of places like Tennessee, North Carolina, Texas, etc.,

Is that something you can do?

  • New friends

New places introduce new people to you and some of them will become friends.  Probably the kind of friends you need.

  • New experiences

Life is made up of memories, not things.

New places create new experiences.  New experiences create new memories.

New memories keep life interesting and mind young.

  • Opportunities

Obviously, you are not moving for the sake of it.

You move to pursue opportunities that your current location cannot provide.  

New places will help you create new opportunities for yourself.

There are other perks of moving to a new location in terms of expanding your perspectives, making you open to new experiences, to name a few. 

It is not guaranteed that your move will be smooth or meet your expectations.  It is important to assess what you (and your family) are willing to sacrifice.

You have to assess the pros and cons of moving to a new location before you start packing.

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Side Hustle

The Internet has afforded us access to a lot of opportunities that were not present during the 2008 recession.

We should all be thankful for this opportunity.

Few examples include: 

  • AirBnB: Can you rent out a few rooms or a section of your home on AirBnB?
  • Renting out: If you have separate access to your basement, is it possible to rent it out?
  • Uber: Is driving Uber or Lyft during your spare time an option?  
  • Fiverr: Can you help others with mini-tasks?  Can you lend your skills to entrepreneurs around the world?  You can find a lot of gigs on platforms like Fiverr.
  • Trading: Few folks have learned to trade in traditional stocks and cryptocurrencies as a side hustle and soon became full time traders.  

These are just a few examples I came up with in less than 1 hour of research. I am sure you can come up with hundreds if you dedicated some time each day.

Keep upgrading your skills

Darwin theory of ‘survival of the fittest’ is a cruel law of nature.

It doesn’t care if you are noble or an evil person.  It treats everyone equally.

In the modern day parlance, this means, as long as you can provide value – you receive value in return.

The day the value you provide is no longer needed, you will find yourself out of job (or business).

Only antidote to this predicament is to stay up-to-date.

Either get better at what you are doing or learn a new skill that helps you do what you really want to do.

It won’t be easy.  I can only suspect that it will be worth it.

What NOT to do in a recession?

Spending money that you don’t have

Credits cards are a sure way to fool people into spending money they don’t have.  

We personally have never used more than 10% limit on our credit card and we only spend what we have in our bank to ‘pay off’, that way, we are not surprised when the bill arrives.

During recession, one has to be extra careful around credit card spending.

It is easy to give into the old habits of spending but very difficult to pay off.

Relying too much on one source of income

“Never put all your eggs in one basket,” this concept of diversification is an old one.  Yet, people somehow forget this core principle when it comes to source of income.

If you rely on one source of income, what happens when that source dries out? 

This is even more concerning if your ‘skillset’ is being replaced by AI, robots or offshore services.

Taking on new loans because of low interest rates

It is very tempting to take an home equity loan or line of credit or peer-to-peer loans. 

Why not, they are so easy to take a loan.

A personal loan on a peer-to-peer platform, like SoFi, takes a few minutes to apply and if approved, you receive the money in 24 hours.

However, you have to factor in whether or not you will have the required cash flow to pay off the installments.

More importantly, can you make do without the loan?  Can you cut down on your expenses?

Are you looking to maintain a luxurious lifestyle on borrowed money?

Think again.

Hurt your credit score

Never take out a loan that you cannot pay off or buy a home that is just too big for your budget and miss a mortgage payment or you skip on credit card payments.

These mistakes could hurt your credit score drastically.

When the market rebounds your ability to buy a home or invest in opportunities will become limited if you have a compromised credit score.

Keep an eye on your credit score.

We personally monitor our credit score and activity on CreditKarma. 

Perspectives that can help you during a recession 

what to do in recession

You only need one job

For those who rely heavily on a job for income, remember, the worst that could happen during a recession is that you might lose your job.

This is scary especially when your job is your only source of income.

However, remember, if you were providing value at one employer – it is more likely than not that your skills are required somewhere else.

When everything is said and done, you only need one job.

Staying away from negative statistics that are bombarded on the news channels might help you stay focused and keep your eyes on ‘opportunities’ rather than ‘misfortunes’.

I found a job during the 2007-2008 recession. Being new to the US, I did not know I was supposed to watch news, instead, I was 100% vested in searching for a job.

I found one job. I dedicated myself to it. I never shied away from putting in extra work (with no extra pay).

I personally believe that this helped me stay employed during the recession.  

Focus on what you can bring to the table and search for places where you can put your skills to use.  When you find a job, put into your 100%.  

Is it time to move on?

Many people cry about their jobs and how they despise them.

This is very unfair to the employer and the opportunity that you are hoarding.

Sometimes, mishaps like a recession or getting fired could be an opportunity for new beginnings.

I read somewhere that many new companies are born during times of despair.

This could be partly because those who were otherwise rotting away at a dead end job are forced to ‘offer’ what they were holding back.

Is that you?

In my opinion, nature finds unorthodox ways to bring you face-to-face with the life you always secretly desired.  Is it time to take the plunge?

Thank you for reading and sharing this article. Stay safe and healthy!

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