Recession

A recession is a broad contraction in economic activity. Two consecutive quarters of falling GDP is the common shorthand, though official calls also weigh employment, income and production.

In a recession companies cut investment and hiring while households stop spending. Weaker demand hurts earnings, which triggers more layoffs — a loop that feeds itself. Governments and central banks respond by cutting rates and loosening money.

Stock markets usually fall before the recession arrives and recover before it ends. By the time the news confirms one, much of the decline has already happened, which makes selling on the headline the latest possible move.

Preparing as an individual is simple. Hold three to six months of expenses in cash, reduce floating-rate debt, and invest only money you will not need soon. Recessions recur, so preparation beats prediction. A downturn is also when the same assets go on sale, so anyone who has been investing a fixed amount each month often ends up better off for having lived through one.