Chaotic stock markets, skyrocketing interest rates and the pain of inflation have left Americans with one question: Are we in a recession?
Probably not yet, but there are signs of economic weakness. When that will turn into a prolonged slump and how long that downturn could last are key questions on the minds of people on Wall Street and beyond.
Major banks have revised their forecasts to reflect the growing possibility of an economic downturn. Analysts at Goldman Sachs estimate the probability of a recession in the coming year at 30 percent, from 15 percent. Bank of America economists predicted a 40 percent chance of a recession by 2023.
Here’s a quick guide to what you need to know about recessions and why some people are talking about the next one now.
What is a recession?
Simply put, a recession is when the economy stops growing and begins to contract.
Some say this happens when the value of goods and services produced in a country, known as gross domestic product, falls for two consecutive quarters or half a year.
In the United States, however, the National Bureau of Economic Research, a century-old nonprofit that is widely regarded as the arbiter of recessions and expansions, has a broader view.
According to the agency, a recession is “a significant drop in economic activity” that is widespread and lasts for several months. Typically, that means not only shrinking GDP, but also falling incomes, employment, industrial production and retail sales.
While the agency’s Business Cycle Dating Committee indicates when we’re in a recession, it often happens long after the slump has already set in. Recessions come in all shapes and sizes. Some are long, some are short. Some cause permanent damage, others are quickly forgotten.
A recession ends when economic growth returns.
Why do some people think a recession is coming?
The short answer: the Federal Reserve.
The central bank is trying to slow the economy to curb inflation, which is now rising at the fastest pace since 1981. Last week, the Fed announced its largest rate hike since 1994, and more big jumps in borrowing costs are likely this year.
The Fed is trying to “take off the bandage,” said Beth Ann Bovino, the chief US economist at S&P Global, by raising interest rates quickly.
“The Fed says we should move now,” Ms Bovino said. “We have to act hard and we have to make many tariff increases before the situation gets even more out of hand.”
Equity investors fear that the central bank will slow growth too much and cause a recession. And the S&P 500 is already in a bear market — the term for when stocks fall more than 20 percent from recent highs.
In the housing market, where mortgage rates have risen to their highest level since 2008, real estate companies such as Redfin and Compass are laying off employees in anticipation of a downturn.
Consumers, the economic engine in the United States, are also concerned about the economy and that is a bad development. In May, consumer confidence reached its lowest point in nearly 11 years.
“When people are depressed, worried about their finances or their purchasing power, they start closing their wallets,” Ms Bovino said. “The way households prepare for a recession is saving. The downside is that if everyone saves, the economy won’t grow.”
None of this means a recession is bound to start. It is important to keep in mind that the labor market is still strong, and that is an important pillar of the economy. About 390,000 new jobs were created in May, the 17th monthly increase in a row, and the unemployment rate has been low for nearly half a century at 3.6 percent.
How common are recessions and how long do they last?
While people speak of ‘business cycles’, periods of growth followed by downturns, there is little regularity in how recessions happen.
Some can happen back-to-back, such as the recession that started and ended in 1980, and the next, which started the following year, according to the agency. Others have happened ten years apart, as was the case with the downturn that ended in March 1991 and the next that began in March 2001, after the dot-com crash of 2000.
Recessions have lasted just over 10 months on average since World War II, according to the NBER, but there are of course some that stand out.
The Great Depression, etched in the minds of older Americans, began in 1929 and ended four years later, although many economists and historians define it more broadly, saying it didn’t end until 1941, when the economy mobilized for the entry of the United States. country. during the Second World War.
The last two recessions show how different they can be: The Great Recession lasted 18 months after it started in late 2007 with the bursting of the housing bubble and the ensuing financial crisis. The recession at the height of the coronavirus pandemic in 2020 lasted just two months, making it the shortest on record, even though the downturn was a brutal experience for many people.
“In terms of just the rate of contraction in actual activity and this rate, the Covid contraction was the most spectacular,” said Robert Hall, chairman of the Business Cycle Dating Committee at the National Bureau of Economic Research, which tracks recessions.
“A very significant portion of the workforce simply wasn’t working in April 2020.”
Can recessions be prevented?
Not really. No matter what they try, politicians and government officials can do little to avert recessions completely.
Even if policymakers could create a perfectly oiled economy, they should also influence the way Americans think about the economy. That’s one of the reasons they try to give the best face to indicators like jobs reports, stock indices, and vacation sales.
Officials can do a number of things to lessen the severity of a recession through the use of monetary policy by the Fed, for example, and fiscal policy, which is set by lawmakers.
With fiscal policy, lawmakers can try to mitigate the effects of recessions. One response could be targeted tax cuts or spending increases for safety net programs such as unemployment insurance that automatically kick in to stabilize the economy when it underperforms.
A more active approach could be for Congress to approve new spending on, say, infrastructure projects to boost the economy by adding jobs, boosting economic output and boosting productivity – although that could be a difficult proposition at the moment because that kind of spending inflation problem.
