March 18, 2024

I am going to take a minute today to share some thoughts on recessions.

As mentioned previously, recessions are a normal part of economic cycles. We can confidently predict that they will happen, but we cannot confidently predict when they will happen. There are many different economic indictors that economists and investment professionals examine on a regular basis to try to understand the health of the economy and how it is trending. None of these indicators can tell the whole story on its own, but looking at all of them together and how they are trending can be useful to attempt to predict where things are heading. As we sit here today the indicators are largely mixed, meaning some of them seem to point to a recession and others do not.

For obvious reasons, I understand why recessions worry many people. It can cause pain in the forms of uncertainly, loss of income, increases in debt or perhaps worse. However, I do think that in general, people tend to worry a bit too much about recessions and I believe the reason for this is recency bias. The last two recessions were particularly painful – the sudden shock of Covid-19 that shut down the economy almost overnight, and the Great Financial Crisis in 2008 that was arguably the second worst economic pullback that we’ve ever had. These were the two most recent recessions so it makes sense that these are what people think about when they hear the word “recession”. However those are not what I would consider to be typical recessions. Those were more severe and abrupt than what might be considered typical.

To put it succinctly, because recessions are normal and we know that they will happen, good financial planning can help prepare for them. Planning cannot take away all of the pain and hardship, but it can help you weather the storm. Personally, I do not worry about recessions. They will happen, and they cannot be avoided. I practice good planning with my clients to attempt to soften the blow of recessions and use them as an opportunity more than a nuisance.