Recession 101: What Are the Signs?

March 10, 2008 — -- Though the country is not yet officially in a recession, some economists argue the signs are pointing to one.

A dismal job report released Friday added to recession fears. With all the chatter about whether there is or isn't a recession, it can be difficult to determine your next move.

"Good Morning America" financial contributor Mellody Hobson explains what a recession is and what you should do to protect yourself.

What is a recession and are we in one?

We typically don't know we are in a recession until it's over, but all the important indicators point to a recession. The new, dismal jobs report we're hearing so much about, the pullback in consumer spending are signs. Despite all of that, we still can't say with absolute certainty that we are in a recession and that's because the definition of a recession is two quarters of shrinking growth. So, it takes a little while for the experts to look at the numbers and see if economic growth has been shrinking for a full six months. That said, we do know with certainty that the economy is in a serious downturn.

How can I recession-proof my finances?

The simple answer is to spend less money. If you have more saved, then you have more money in case you lose your job, or get hit with another financial emergency. But the irony is that a drop in consumer spending will actually keep us from getting out a recession sooner.

The consumer puts us in a recession and gets us out of one, based on how much they spend. And in a typical recession, consumers tap into the equity in their homes to keep spending freely, but the current subprime mess and that sharp downturn in real estate prices have left consumers with very little cushion. The bottom line is people are going to naturally reign in their spending until they start to feel better about the economy.

It's also important to point out that the Federal Reserve is doing its part to help improve the economy. It has cut interest rates five times since September.

How long do recessions normally last?

This downturn is packing a pretty strong punch. The price of oil is at record levels and the prices of just about everything -- from milk to computers are on the rise. Economists are predicting that if oil stays around $100 a barrel for the next year, consumers are going to spend an additional $100 billion through the end of next year. That means less money for everything else. That's not a good indicator that we will be out of this downturn anytime soon.

But it's not all bad news. Recessions are a perfectly natural part of an economic cycle. Historically, we face a recession once a decade. And since 1980, there have been four recessions. The typical mild recession lasts about 5 months and it's very rare that a recession would last for more than a year.

What about those stimulus checks from the government? Are they going to help and when will I see it?

It will make a real difference, because it puts that money back into the economy. And as we said, consumers are the financial engine of economy and consumer spending is what gets us out of recessions more quickly.

Now, those checks aren't in the mail yet. The Treasury Department is expected to send out the rebates this may, and more than 130 million people will get them. And here's a tip: The sooner you file your taxes, the faster you'll get the rebate. So, it really pays to get your taxes done as soon as you can this year.

What signs indicate we are coming out of a recession?

It's impossible to predict exactly when a recession has ended, but there are three clear signals that we are on the way back out.

First, we'll see an increase in consumer spending on everything from electronics to plane tickets to clothes. Consumer spending is truly the backbone of our economy. It accounts for two/thirds of it, and without strong spending, everything else is weak.

Second, there will be a decrease in the number of unemployment claims. As we said, Friday we saw a major increase in job cuts -- 63,000 total. When this number reverses, we know we are on the right track. Employers will start to hire when they once again have sound footing.

Third, the stock market will rebound. The market is incredibly efficient and always sees the future. So, when all those things happen, we know the economy is on the way up again.