Chaotic stock markets, sky-high interest rates, and the pain of inflation have left one question in Americans’ minds: are we in a recession?
Probably not yet, but there are signs of economic weakness. When this becomes a sustained slump and how long this downturn might last are important questions on the minds of people on and off Wall Street.
Major banks have raised their forecasts to reflect the increasing likelihood of an economic downturn. Analysts at Goldman Sachs put the chance of a recession next year at 30 percent, up from 15 percent. Bank of America economists projected a 40 percent chance of a recession in 2023.
Here’s a quick guide to what you should know about recessions and why some people are now talking about the next one.
What is a recession?
Simply put, a recession is when the economy stops growing and starts to shrink.
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, on the other hand, the National Bureau of Economic Research, a century-old nonprofit organization widely regarded as the arbiter of recessions and expansions, takes a broader view.
According to the office, a recession is “a significant drop in economic activity” that is widespread and lasts for several months. Typically, this means not only falling GDP, but also falling incomes, employment, industrial production and retail sales.
While the bureau’s Business Cycle Dating Committee explains when we’re in a recession, it often happens long after the recession has already begun. Recessions come in all shapes and sizes. Some are long, some are short. Some cause lasting damage, while 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 its fastest pace since 1981. Last week, the Fed announced its biggest rate hike since 1994, and more big jumps in borrowing costs are likely later this year.
The Fed is trying to “rip the bandage off,” said Beth Ann Bovino, chief US economist at S&P Global, by raising interest rates quickly.
“The Fed says we need to move now,” Ms. Bovino said. “We need to act hard and frontload many rate hikes before the situation gets even more out of control.”
Equity investors are concerned that the central bank could slow growth too much and trigger 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 levels since 2008, real estate companies like Redfin and Compass are laying off employees in anticipation of a downturn.
Consumers, the engine of the economy in the United States, are also becoming increasingly concerned about the economy, and that’s a bad thing. In May, consumer sentiment hit its lowest level in almost 11 years.
“When people are depressed, worried about their finances or worried about their purchasing power, they start closing their wallets,” Ms Bovino said. “Households prepare for a recession by saving. The downside is if everyone saves, the economy won’t grow.”
None of this means a recession is certain to begin. It’s important to remember that the job market is still strong, and that’s a key pillar of the economy. About 390,000 new jobs were added in May, the 17th straight month, and the unemployment rate is 3.6 percent, a low of nearly half a century.
How often do recessions happen and how long do they last?
While people talk about “business cycles,” periods of growth followed by downturns, there’s little regularity with how recessions occur.
Some may occur sequentially, like the recession that began and ended in 1980 and the next, which the bureau said began the following year. Others have occurred a decade apart, as was the case with the downturn that ended in March 1991 and the next that began in March 2001 after the 2000 dot-com crash.
On average, recessions since World War II have lasted just over 10 months each, according to the NBER, but of course there are a few that stand out.
The Great Depression, which is etched in the memories of older Americans, began in 1929 and ended four years later, although many economists and historians define it more broadly and say it did not end until 1941, when business mobilized for the nation’s entry into the Second world war.
The last two recessions show how different they can be: The Great Recession lasted 18 months after beginning in late 2007 with the bursting of the real estate bubble and the resulting financial crisis. The recession at the height of the coronavirus pandemic in 2020 lasted just two months, making it the shortest ever, although the downturn was a brutal experience for many people.
“In terms of the sheer magnitude of the contraction in real activity and the speed with which it occurred, the Covid contraction has been the most spectacular,” said Robert Hall, chair of the National Bureau of Economic Research’s Business Cycle Dating Committee, which tracks recessions.
“A very significant portion of the labor force was simply not working as of April 2020.”
Can recessions be prevented?
Not really. Politicians and government officials, try as they may, can do little to stave off recessions entirely.
Even if policymakers were able to create a perfectly oiled economy, they would also need to influence how Americans think about the economy. That’s one of the reasons they try to make the most of indicators like job postings, stock market indices and Christmas retail sales.
Officials can do a number of things to mitigate the severity of a recession, such as through the use of monetary policy by the Fed and fiscal policy set by legislatures.
With fiscal policy, legislators can try to cushion the effects of recessions. One response could be targeted tax cuts or increased spending on safety nets like unemployment insurance, which kick in automatically to stabilize the economy when it’s underperforming.
A more active approach could be for Congress to authorize new spending on, for example, infrastructure projects to boost the economy by creating new jobs, increasing economic output and boosting productivity – although this could be a difficult proposition at the moment given that these types of Spending could worsen the economy Inflation problem.