What happens in a recession

Recession. It’s a dirty word people use to scare us into thinking we’re on the verge of losing it all. What most people don’t understand is recessions are normal. The financial markets constantly fluctuate, and history proves that recessions are generally predictable and brief. In fact, a mere ten months is the average length of every recession since the late 1940s.

Preparation is the best way to weather the storm of a recession, and part of this is knowing what happens in a recession and how you can protect yourself, your family and your assets.

What happens in a recession

A recession doesn’t just happen. There’s no singular sign of a recession, but common pre-downturn indicators often arise to help us understand what will happen in a recession and how it will affect us personally.

One key indicator of an impending economic downturn is employers preparing by cutting hours and pausing raises for salaried workers. Mass layoffs tend to follow, causing a rise in unemployment and a widening income inequality gap, primarily affecting working and middle-class people.

A reduction in the workforce is usually followed by a decline in consumer spending. Unemployed people don’t have the extra money to spend on retail sales and dining out, which leads to a decrease in manufacturing and production. Consequently, businesses lack the demand to sustain production levels – without that, they buy fewer raw materials, which has an impact on manufacturing industries.

What happens to small businesses in a recession

Small businesses and mom-and-pop stores are often the first to feel the impact of a recession. Smaller profit margins force these businesses to get creative to survive the economic downturn.

What happens when the economy crashes? Small businesses often suffer reduced cash flow, decreased consumer spending, and smaller demand for products and services, inevitably leading to a drop in staffing levels and marketing budgets. Employees are often the first to be let go when a small business is losing money because it is easier to do than reducing a rental contract for office space or returning purchased raw materials.

Decreased demand for products and services also contributes to the decrease in workforce demand. These short-term sacrifices are necessary to survive, but they often have long-term effects that continue long after the recession ends. For example, pausing marketing spending for months means a potential drop in new customers. Plus, it may take a lot of work to hire the same level of talent once the economy recovers. What happens in a recession can devastate small businesses, but the strongest will survive, learn from the issues and develop plans to move forward.

Resist giving into fear during a recession

Fear is the first emotion most people feel during a recession. It’s natural to feel scared about losing a job or a business. However, it’s also important to fight against the fear of what will happen in a recession and move confidently toward achieving an unshakeable mindset.

Recessions are natural, and so are the resulting economic upswings. Eventually, the economy will rebound and thrive again, but in the meantime, it’s vital to remain receptive to new opportunities and ideas. If you own a small business during a recession, be bold and pivot when necessary.

When the Covid-19 pandemic hit, many restaurants took a big hit and ended up closing, but some also survived because they changed their business models to fit the circumstances. To make ends meet, sit-down restaurants switched focus to online ordering, take-out, and selling drinks in to-go cups to compensate for the decrease in sales. These small businesses understood what happens in a recession and took the necessary steps to minimize damage to their bottom line.

When the economy crashes, adapting to circumstances is necessary for everyone, not just small businesses. Opportunities always arise during a recession, but you need to be willing to take advantage. Stop focusing on what happens when the economy crashes and start developing backup plans or different income streams. In short, don’t put all your eggs in one basket.

The key to surviving a recession is building a strong and unshakeable mindset. Bad things will always happen – how we prepare and react makes a huge difference to the level of impact on our lives. Look at a job loss as an opportunity to start the small business you’ve always dreamed of or go back to school to create a new career.

Whatever it is, move your mindset from “what will happen in a recession?” to “what opportunities will the recession provide for me?” A recession is an excellent time to explore your options, resist the temptation to give into fear, and move forward with a clearer vision of your future goals.