We're Technically in a Recession -- but Does That Matter?

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  • There are different ways to define a recession.
  • Based on one factor, we've already entered one -- but there's no need to panic.

Here's why you shouldn't get caught up in the semantics.

You'd think a recession would be one of those obvious things -- that people know it's happening. But there are different metrics we can use to define recessions.

Some economists say a recession is defined as two consecutive quarters when gross domestic product shrinks (GDP). By that measure, the U.S. economy is in a recession right now.

But should we lose sleep over that? Not at all.

Don't panic just yet

While some economists might use declining GDP to mark a recession, that's not the only way to define one. Often, recessions are associated with periods of widespread economic decline that result in high unemployment.

But right now, the labor market isn't weak -- it's thriving. And unless things take a turn, there's really no need to stress over the technicality of a recession.

How to prepare for a more impactful downturn

While the job market may be solid right now, things do have the potential to take a turn for the worse later this year or in 2023. The Federal Reserve steadily implemented interest rate hikes in an effort to slow the pace of inflation. The hope is that when it's more expensive to borrow, consumer spending will shrink enough for supply chains to catch up to public demand.

But the danger in raising interest rates so quickly is that it could lead to a substantial decline in consumer spending. And that could spur the type of recession in which lots of jobs are lost in short order.

That's the sort of scenario it pays to prepare for. And one of the best ways to do so is to boost your emergency fund. Ideally, you should have at least three months' worth of essential living costs tucked away in your savings account. If you don't, try beefing up your emergency fund by cutting back on non-essential spending (think dining out less frequently, for instance, and dumping cable costs).

You might also want to boost your job skills so you're less vulnerable to getting laid off if economic conditions worsen. If you learn a skill at work that nobody else has, that alone could keep you off the chopping block.

At the same time, you may want to pick up a side hustle. That extra income could help boost your savings balance in the coming months. And then, if something happens to your main job, you have a backup source of income while you look to get hired elsewhere.

There's no need to lose sleep when -- by just one measure -- we've technically entered recession territory. At the same time, it's definitely a good idea to shore up your savings and take steps to secure your job (to the degree you can) in case a more substantial recession hits in the near future.

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