Recession fears have been fueled by recent events, including President Trump’s new tariffs and escalating trade tensions. But what does this really mean for the economy?
A recession is a sharp contraction in economic activity that typically lasts for six months or more. It’s one of four stages of the economic cycle: growth, peak, recession and trough. The most important factor to keep in mind is that a recession is not the same as an economic depression. It’s possible for the economy to contract without dipping into depression territory (which can have many negative impacts).
While it may seem counterintuitive, a recession usually begins with unexpected shocks to the world’s economies. This can be caused by things like wars, pandemics or international financial collapses. But more typically, recessions start because people and businesses become nervous about future spending. This can cause them to cut back on discretionary purchases, which can slow overall economic growth and send stocks tumbling.
Recession fears may also be driven by rising interest rates, which can cause everything from mortgages to credit card rates to rise. This can eat into consumer spending, which is the biggest driver of economic growth. The Fed’s goal is to reach a “soft landing” where interest rates are high enough to lower inflation, but low enough to avoid recession. If the economy does head into a downturn, you should consider reviewing your budget and making adjustments to help prepare for a potential loss in income. A general rule is to save three to six months of living expenses, and try to pay down your debt as much as possible.