How can you predict a market recession?

How can you predict a market recession?

For an everyday individual, a recession is most probably difficult to predict. We often become aware of a recession once we are drastically falling into one, and companies are focusing more on cutting their costs, firing up the unemployment rate to its peak. What are the actual indicators of a recession? Is there a way for an ordinary individual to look out for one before it happens, or is it just in the forecast of economists? Realistically, economists are also only able to forecast recessions while we are in one and an early warning system is yet to be accomplished, remaining a dream.
What is a recession?
In basic terminology, with the heavily economic definition broken down into simpler terms, a recession refers to a significant decline in economic activity in a certain region. Recessions are officially declared by the National Bureau of Economic Research (NBER). According to Investopedia, recessions can be visible in industrial production, employment, real income and retail trade. A recession is a normal, but unpleasant part of the business cycle. The economic pain caused by recessions, though temporary, can cause major impacts that alter the state of an economy. This can occur due to structural changes in the economy as obsolete firms, industries, or technologies and are swept away.
To keep you informed about how you can foresee a recession, here are a few key indicators that economists use to keep track of economic performance:

  • The unemployment rate: During a recession, one of the first things that makes a movement is the rate of unemployment. Without a recession, this usually remains still and barely shows any movement, which is why it is said to be a lagging indicator. It is highly unlikely that it would be the first aspect to pick up signs of trouble.
  • The yield curve: The term sounds fairly technical, it is — but fortunately it is one of the best indicators of a recession. A yield curve is basically a measurement of how confident investors are in the economy. In normal times, they demand high returns and are willing to tie in their money in the long term but during a recession or when they are nervous, they settle for lower rates. When the long term returns fall back in comparison to the short term ones, it is said that the yield curve has been “inverted.” The inversion of the yield curve predicts a high probability of a recession.
  • Consumer sentiment: This is a monthly measure of consumer confidence. Based on 5,000 households, the index is calculated each month on the basis of a household survey of consumer’s opinions on current conditions and the future expectations of the economy. Based on a 3 month rolling average, if 15% of sustained decline is observed on the consumer sentiment index, there is said to be a recession. A sustained decline in the consumer sentiment index can stand as a reliable recession indicator.
  • Quit rates: When workers are confident in the economy, they are more likely to look for better opportunities within the working environment. As they are able to grasp these opportunities, they take the step of leaving the current workspace voluntarily. During a recession, workers try their best to stay where they are so that they don’t risk not being able to attain another opportunity or in the worst case, they are usually terminated from the company – which contributes to the unemployment rate.
  • Auto sales: When car sales are high, its a sign that consumers are feeling good and confident in the economy. Retail car sales have peaked before a recession and dropped significantly once it begins. It is a big sign that sales are falling, and can be considered as one of the signs of recession.

Along with foreseeing a recession, there are several ways in which you can also prepare for a recession. They always say that its better to be safe than sorry, and since we all are not financial professionals, it is important for us to take precaution before we suddenly see ourselves drowning in a financial crisis. Giving yourself a financial cushion – or in simple words, saving for emergencies is one of the biggest things that you can do. The economy takes a dip once every several years and its an inevitable aspect of our lives, but saving and preparing for it will allow your future self to thank you for thinking so far ahead.
Losing your job in the state of a recession could be an immense blow to your lifestyle, so diversifying your income becomes extremely crucial in such a case. The simplest way to do that is by starting to identify how you can earn secondary sources of income. It doesn’t matter if you are a superstar at your job – when the crisis hits, it hits deep in areas that you might have absolutely no idea about. Thanks to the growth of innovation and technology, a secondary source of income can come by at your fingertips. You simply need to take a good look around to see what is best for your personal needs.
We at SmartCrowd not only promote the diversification of your earnings but promote the concept of long-term planning and thinking ahead for your future.

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