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Kimberly Amadeo

How Would a Recession Affect Me?

By January 23, 2008

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A reader asks:
Although I am currently unaffected by the economic situation, I know that a recession can create a domino effect, therefore, what should I be wary of in the future? Thanks.
In a recession, economic growth falls dramatically. The stock market declines, and usually enters a bear market. This usually causes a "flight to safety", where investors buy Treasury Bonds, which causes interest rates to fall. Employers reduce new hiring, and eventually start laying off workers.

To revive the economy, the Federal Reserve usually starts lowering interest rates to spur business lending and investment. The Federal Government may institute tax breaks to spur consumer spending.

The current economic slowdown was started by a housing market decline which itself was initiated by the Subprime Mortgage Crisis. This decline also means that existing home values have fallen by 10%. In a recession, prices could fall another 5-10%.

How It Affects You

You have probably already felt the impact on your home's value, and therefore your home equity. This reduces your wealth. You will continue to feel the impact on your retirement savings, as stock prices decline, further reducing your wealth.

The greatest risk is if you are in an industry that has layoffs, and you lose your job. If you aren't laid off, then you will probably be asked to work longer hours to compensate for the new employees who aren't hired.

As the recession continues, you may benefit from lower interest rates and tax cuts, which are applied to everyone. Normally, this would help you refinance or get a better mortgage. However, lenders have become more stringent about credit standards, so you won't benefit unless you have great credit scores.

Recession-Proof Your Personal Finances

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Comments

August 11, 2009 at 3:58 pm
(1) prettyladi_3 says:

this is A GREAT ARTICLE

August 12, 2009 at 11:18 pm
(2) Kimberly Amadeo says:

Thanks!

Kimberly

November 2, 2009 at 1:28 am
(3) ananth says:

sensex is falling again after reaching 17000 points what matters for that and is there any threats in future?

November 2, 2009 at 2:12 pm
(4) Kimberly says:

Reports are that the Sensex was overvalued. (See Silicon India. The world’s markets have become highly correlated. Though the recession is over, there are still a lot of concern about how long it will take us to get out of the recession. (See Recession Is Over, Thanks to Stimulus.
Kimberly

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