A recession is defined as a significant decline in economic activity that lasts for months or even years. It is typically accompanied by rises in unemployment, decreases in consumer and business spending, declining incomes, and falling prices. Certain goods and services tend to decrease in value or demand during recessionary periods. Understanding what loses value can help consumers make smart financial decisions during tougher economic times.
Housing and Real Estate
The housing and real estate markets often see declines during recessions. When the economy is doing poorly, fewer people have the income or confidence to purchase homes. Banks also tighten lending during recessions, making mortgages more difficult to obtain. With lower demand, housing prices typically drop. According to data from the Federal Housing Finance Agency, U.S. home prices fell almost 5% in 2008 during the Great Recession and more than 30% during the early 1990s recession. Rents can also decrease when vacancy rates rise due to fewer renters.
Stocks
Stock markets usually decline sharply during recessions. Lower corporate earnings and negative economic outlooks cause investors to move money out of stocks. Uncertainty causes increased volatility as well. The S&P 500 stock market index fell 57% during the 2007-2009 recession. Some stocks may lose more value than others depending on the industries and companies most impacted by the downturn. For example, luxury and cyclical goods often deteriorate more than necessities.
Commodities
Commodity prices tend to be procyclical, meaning they rise during economic expansions and fall during slowdowns. Oil and gas prices frequently plunge during recessions as demand declines. According to the U.S. Energy Information Administration, the average annual OPEC crude oil price per barrel dropped from $99.67 in 2008 to $60.86 in 2009. Metal prices like copper, aluminum, and steel also sink when industrial activity slows. Food commodities can be impacted too if households cut spending.
Luxury Goods
Expensive jewelry, watches, vehicles, electronics, and other luxuries often see weakened sales during recessions as consumers reduce discretionary spending. Luxury retail companies like Nordstrom and Tiffany & Co. reported double-digit revenue declines during 2008 and 2009. Luxury automakers such as Aston Martin and Rolls Royce saw sales plummet over 30%. Businesses also cut back on corporate events and expensive team building activities. Overall demand falls rapidly for non-essential luxury products and services.
New Cars
New car sales typically slump during recessions for a few reasons. High unemployment leaves fewer consumers with stable income needed to purchase big-ticket items. Lower demand enables dealers to offer discounted pricing, incentives, and favorable financing to move inventory. According to Edmunds automotive research data, new vehicle sales in the U.S. fell 18% year-over-year from 2007 to 2008 as the economy entered recession. Used car sales often rise as buyers look for more affordable options.
Home Improvements
Spending on home renovations, remodeling projects, and new furniture usually declines when households minimize discretionary expenses. Property improvement spending dropped significantly from 2006 to 2010 during the housing crisis and recession, according to the Joint Center for Housing Studies of Harvard University. Consumers often take on these big projects when they feel wealthy from home value gains and strong economic conditions. Home improvement spending bounced back over 50% by 2018 as the economy recovered.
Vacations and Travel
Travel industry revenue tends to decrease during recessions as individuals and families cut costs by taking fewer and less expensive vacations. For example, U.S. personal consumption expenditures on transportation goods and services, including air travel and lodging, fell nearly 18% from the fourth quarter of 2007 through the second quarter of 2009 during the Great Recession, according to Bureau of Economic Analysis data. Businesses also trim travel budgets during tough economic times. International travel to the U.S. declines as well when foreign currencies weaken against the dollar.
Alcohol
Alcohol consumption often declines during periods of economic uncertainty and high unemployment as consumers have less disposable income. During the Great Recession, market research firm Nielsen found that 30% of Americans said they were drinking less alcohol to save money. Restaurants, bars, vineyards, distilleries, and breweries can be hit hard. However, alcohol sales that focus on home consumption may hold up better than luxury drinking experiences. Consumers tend to buy cheaper store brands over premium liquor and wine.
New Technology Products
The latest phones, computers, TVs, and other electronics usually face weaker demand during recessions. Consumers think twice about expensive upgrades or replacing functioning tech products if money is tight. Businesses also pause investments in new hardware and software. According to Gartner research, global IT spending contracted nearly 5% in 2009 as companies delayed tech projects. However, competitively priced entry-level tech goods can gain market share during downturns if consumers need affordable replacements.
| Goods/Services | Typical Impact During Recession |
|---|---|
| Housing | Prices and sales fall as demand declines |
| Stocks | Equities markets drop on negative outlooks |
| Commodities | Industrial and energy prices sink with lower demand |
| Luxury items | Purchases minimize for non-necessities |
| New cars | Sales slump but used cars gain share |
| Home improvements | Renovation spending drops sharply |
| Vacations | Less frequent with shift to lower cost options |
| Alcohol | Bars hurt but home consumption holds up |
| New technology | Upgrades and replacements delayed |
Why Do These Decline During Recessions?
There are some common reasons why demand tends to drop for the goods and services mentioned during economic slowdowns:
- High unemployment reduces consumer spending power across the board.
- Heightened job insecurity makes people more likely to save than spend.
- Access to credit tightens as lenders exercise more caution.
- Businesses cut costs, employees, and capital investments.
- Negative market outlooks sap consumer and business confidence.
- Uncertainty causes households and companies to defer major purchases and projects.
- Prolonged recessions lead people to closely examine needs versus wants in spending.
When incomes decline and economic prospects look poor, consumers simply pull back on all unnecessary purchases. Businesses slash costs across the board, impacting both investment and employee spending. Lenders also make access to financing more challenging just as major purchases need funding. Even employed consumers spend less on discretionary goods and services during extended recessions just due to heightened uncertainty about the future.
What Tends to Retain Value Better in Recessions?
While demand falters for many goods and services during economic downturns, some industries manage to maintain stronger revenues:
- Discount retailers catering to budget-conscious shoppers gain market share.
- Grocery stores benefit from more home cooking and less restaurant dining.
- Healthcare continues growing as an essential service despite some belt tightening.
- Education sees steady demand though consumers pursue more affordable options.
- Rental housing attracts those less able to qualify for mortgages.
- Public transportation ridership increases as commuters look for savings.
- Home entertainment benefits from consumers seeking budget diversion.
- Auto repairs gain share over new car purchases.
Businesses offering competitively priced essentials or serving as replacements for pricier goods tend to endure better.Healthcare continues growing during recessions but consumers choose more selectively. Education demand is stable too but students favor community colleges over high-priced universities. Entertainment supporting at-home activities also benefits. So while broad consumer spending declines, affordable and practical goods and services hold up better.
Examples of Past Recessions
Looking at major U.S. economic downturns over the past 50 years illustrates the typical impact on goods and services:
1973-1975 Recession
- Housing sales fell 30% from 1972 to 1975
- S&P 500 lost over 45% from 1973 peak
- Oil prices quadrupled in 1973-74
- Unemployment peaked at 9% in May 1975
- New car sales dropped 13% from 1973 to 1974
Early 1980s Recession
- New housing starts declined nearly 80% from 1978-1982
- S&P 500 lost 27% from 1981 to 1982
- Oil dropped over 50% from 1980 to 1986
- U.S. unemployment reached almost 11%
- New car sales fell 18% from 1978 to 1982
Early 1990s Recession
- Home prices fell almost 10% nationally from 1990 to 1996
- S&P 500 lost 19% from July 1990 to October 1990
- Oil declined 40% from 1990 to 1994
- National unemployment topped 7%
- New car and truck sales dropped 13% from 1989 to 1991
2007-2009 Great Recession
- Median home prices fell 34% from 2006 to 2009
- S&P 500 lost over 50% from late 2007 to 2009
- Oil plunged from $133 per barrel in 2008 to $42 in 2009
- Unemployment reached 10% in October 2009
- New vehicle sales dropped 40% between 2007 and 2009
Each major recession over the past half century confirms that housing, stocks, commodities, vehicle sales, and more tend to lose substantial value during economic declines. Job losses also persist, further hampering consumer spending.
Strategies for Consumers
How should everyday consumers prepare for recessions based on the expected impact on goods and services? Here are some tips:
- Avoid major purchases like vehicles and homes late in the economic cycle.
- Maintain adequate emergency savings to withstand job loss.
- Closely manage discretionary spending and focus on needs over wants.
- Consider inexpensive staycations over lavish vacations.
- Repair goods instead of always replacing them.
- Use coupons, shop sales, and buy generic brands at grocery stores.
- Cook more low-cost meals at home instead of dining out.
- Delay any home renovations if possible until the economy rebounds.
The keys for consumers are building up rainy day funds, spending cautiously, buying only essentials, and pursuing less expensive options whenever possible. Practical saving and spending measures will help households ride out recessionary periods.
Conclusion
Recessions take a heavy toll across many sectors of the economy as rising unemployment and negative sentiment cause sharp reductions in consumer and business spending. Big ticket items like housing, vehicles, and luxury goods experience sizable declines in demand. Tourism, dining, entertainment, and other discretionary purchases fade as well. Even commodity prices sink with lower global demand during prolonged slumps. However, consumers still need to buy groceries, medication, and other essentials. They also pursue more affordable substitutions like used cars or rentals when finances tighten. So while recessions hurt wide swaths of the economy, companies catering to budget-focused households can withstand the storms better until conditions improve. Understanding which goods and services face headwinds provides consumers helpful insight into smart financial decisions during recessionary periods.