If you’ve read anything about the world’s economy in the last couple years, you’ve probably heard of the term ‘recession’. A recession is really just a period of time during which trade and industrial activity are reduced, as indicated by a fall in a country’s Gross Domestic Product (GDP) – the snapshot number reflective of a country’s total market value, including all goods and services produced within the specified country’s borders. Recessions spell bad news, as on top of production being reduced, it also means people are less willing to spend. As you would guess, this has adverse effects on a country’s economy. 

The good news is, not all recessions are identical. While at worst, a recession could be debilitating to a country’s economic functions, it usually doesn’t get to that point. More often, recessions are indicative of problems in smaller sectors within a country’s economy, and don’t last too long before they’re patched up. It’s important to be able to tell when a recession is a symptom of smaller problems, and when it’s a sign of worse to come. 

Most economists will usually classify dips in the economy as recessions when they’ve lasted for two or more consecutive quarters. 

The usual trends surrounding recessions are as follows: 

1. A period of economic growth, where housing activity increases and bank policies are more lenient.
2. Unemployment rates trend toward zero as industries grow and require more manpower, wages increase, profit margins reach their apex, and inflation sets in as perceived value grows faster than actual value
3. Everything begins to slow down, with inflation going far out of proportion, bank policies suddenly tighten, and profit margins come down as a result of businesses panicking. 
4. Finally, a recession is observed, where unemployment rises, economic activity declines, profit margins remain low, and bank policies begin to ease. From here, low profit margins and lenient bank policies will help economies grow again.

As indicated above, the immediate effects of a recession are only really felt for a short while, but can be severe enough to close businesses and cause unemployment. Thankfully, recessions don’t last very long, as soon enough, banks and businesses catch on to the rampant decline and modify their policies and operations to follow suit. Based on Capital Group’s analysis, the average length of a recession since 1950 is only 11 months, with a range of eight to 18 months. 

Additionally, recessions tend to decrease total GDP by only a small amount – far less than the growth an economy will experience during periods of economic recovery and expansion. 

	Average Expansion	Average Recession
Months	67	11
GDP Growth	24.3%	-1.8%
S&P 500 Returns	117%	3%
Net Jobs Added	12M	-1.9M

Being a great investor is being able to read when and why a recession is occurring, and adapting to follow suit. Making sure your investments are in stable, unaffected sectors of an economy during a recession will allow you to maximize your ability to invest in the following recovery period. Yes, recessions could spell bad news for you, but may also present great opportunities to turn your investment portfolio around entirely.