Recently, there has been lots of talk about the US and if we will be entering one or not.
But, what is a recession and what does it mean for us and economically?
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What is a recession?
The technical definition of a recession is two consecutive quarters of declining GDP. GDP stands for gross domestic product– it is a measure of economic growth. However, many experts agree that the technical definition is not enough to call it a recession.
The United States’ National Bureau of Economic Research (NBER), a nonprofit organization. Their business cycle committee tracks peak and trough months of economic growth. NBER defines a recession as widespread contraction in the economy that lasts more than a few months. They have also added three criteria that must be met to qualify a time as a recession– depth, diffusion, and duration.
A recession is a national event. During a recession, consumers spend less, people lose their jobs, and generally, everyone is taking losses. There are a few signs of a recession, but there is not one clear indicator.
What causes a recession?
Previously, recessions have been caused my market-related shocks to the economy. For example, the 2008 financial crisis was driven by inadequate lending standards, leading to a housing crisis. In the early 2000s, the dotcom crash happened after too many investments in technology stocks.
The Federal Reserve works to prevent recessions through policy decisions. Recently, they have been raising interest rates to combat inflation. Making policy changes, especially those about money, requires balance. More than two-thirds of the recessions Americans have experienced since World War II were caused by an increase in interest rates that was too fast for the economy to handle.
The Federal Reserve increased interest rates by three-quarters of a percentage point in June and again in July. It will take several months to see the impact of these changes.
Are recessions common?
It is normal for the economy to experience recessions. However, they have become less frequent and are shorter. According to the International Monetary Fund (IMF), between 1960 and 2007, there were 122 recessions that impacted 21 advanced economies.
Since the Great Depression, governments around the world have adopted counter-cyclical fiscal and monetary policies. These have been put in place to ensure that a typical recession does not turn into something with long-term damaging effects. Some of these are automatic, like increased spending on unemployment insurance, which makes up a fraction of lost income for laid off workers. Other measures like interest rate cuts designed to prop up employment and investment require central decision making.
Why are Americans worried about a recession?
Most everyone thought that life post-pandemic would generate high demand after years of lockdowns are restrictions. Rather than the economic boom that was expected, now Americans are worried about inflation and recession.
Consumers are feeling the increased costs for everyday life. Groceries are more expensive, and so is housing. The cost of living is up 9.1% from last year.
Americans are also concerned about how the Fed has raising interest rates will impact them. Rising credit card, mortgage, auto loan and other interest rates also reduce the disposable income Americans have to spend in the economy. This weighs on corporate earnings, stock prices, and makes it more expensive for companies to borrow and invest money.
Concerns over a recession ramped up in July after the yield on 2-year US Treasury jumped above the yields on 10-year . This is known as a yield curve inversion. Inverted yield curves have historically been a strong economic recession indicator. Historically, two-thirds of the time this has been noted, the US has fallen into a recession within 18 months. The July yield curve inversion is the deepest one since 2007.
Is the US in a recession right now?
Economists agree, that right now, we are not in a recession. However, the outlook is bleak. More than two thirds of surveyed macroeconomists believe that the US will enter a recession in 2023. Generally, experts find recessions hard to predict– especially how long it might last. When it comes to the duration, there are so many conflicting economic factors at play.
Some experts believe that we might be able to avoid a a recession all together because of the strong labor market. In June, unemployment rates remained low– 3.6%, the same rate as the three months previous. Job openings have also remained high. In May, nearly 1.9 jobs were available for each unemployed worker.
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