What is a recession?
Chaotic stock markets, sky-high interest rates and the pain of inflation have left a question at the top of Americans’ minds: Are we in a recession?
Probably not yet, but signs of economic weakness are emerging. When will this turn into a protracted recession, and how long this downturn could last, are important questions that concern people on Wall Street and outside it.
Major banks have raised their forecasts to account for the growing possibility of an economic slowdown. Goldman Sachs analysts put the probability of a recession over the next year at 30%, down from 15% previously. Bank of America economists predicted a 40% chance of a recession in 2023.
Here’s a quick guide to what you need to know about recessions and why some people are now talking about the next one.
What is a recession?
Simply put, a recession occurs when the economy stops growing and starts to contract.
Some say it happens when the value of goods and services produced in a country, known as gross domestic product, declines for two consecutive quarters, or six months.
In the United States, however, the National Bureau of Economic Research, a century-old nonprofit organization widely seen as the arbiter of recessions and booms, takes a broader view.
According to the bureau, a recession is “a significant decline in economic activity” that is widespread and lasts for several months. Typically, this not only means lower GDP, but also lower incomes, employment, industrial production and retail sales.
While the office’s business cycle dating committee declares when we’re in a recession, it often happens long after the crisis has already begun. Recessions come in all shapes and sizes. Some are long, some short. Some create 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, in order to rein in inflation, which is now rising at its fastest pace since 1981. Last week, the Fed announced its biggest interest rate hike since 1994, and further significant jumps in borrowing costs are likely this year.
The Fed is trying to “rip the bandage off,” said Beth Ann Bovino, chief U.S. economist at S&P Global, by rapidly raising interest rates.
“The Fed is saying we have to act now,” Bovino said. “We need to act tough and we need to anticipate many rate hikes before the situation spirals even further out of control.”
Stock investors fear the central bank will slow growth too much, triggering a recession. And the S&P 500 is already in a bear market – the term for when stocks fall more than 20% from recent highs.
In the housing market, where mortgage rates have reached their highest level since 2008, property companies like Redfin and Compass are laying off employees in anticipation of a downturn.
Consumers, the economic engine of the United States, are also increasingly worried about the economy, and that’s a bad development. In May, consumer confidence hit its lowest point in almost 11 years.
“If people are depressed, worried about their finances or their purchasing power, they start closing their wallets,” Bovino said. “The way households prepare for a recession is to save. The downside is that if everyone saves, the economy doesn’t grow.
None of this means that a recession is sure to start. It is important to keep in mind that the labor market is still strong and is an important pillar of the economy. About 390,000 new jobs were created in May, the 17th straight monthly gain, and the jobless rate is near a half-century low of 3.6%.
How often do recessions occur and how long do they last?
While people talk about “business cycles,” periods of growth followed by downturns, there is little regularity in how recessions occur.
Some may occur back-to-back, such as the recession that began and ended in 1980, and the next one, which began the following year, according to the bureau. Others have occurred a decade apart, as was the case with the crisis that ended in March 1991 as well as the next, which began in March 2001, following the dot-com crash. of 2000.
On average, recessions since World War II have lasted just over 10 months each, according to the NBER, but of course some stand out.
The Great Depression, which is etched in the memory of older Americans, began in 1929 and ended four years later, although many economists and historians define it more broadly, saying it never ended. than in 1941, when the economy mobilized for the entry of the nation. in World War II.
The last two recessions show how different they can be: The Great Recession lasted 18 months after starting in late 2007 with the bursting of the housing bubble and the resulting financial crisis. The recession at the height of the coronavirus pandemic in 2020 only lasted two months, making it the shortest ever, even though the recession was a brutal experience for many people.
“In terms of the sheer amount of contraction in real activity and how quickly, the COVID contraction has been the most dramatic,” said Robert Hall, chairman of the National Bureau of Economic Research’s Business Cycle Dating Committee, which follows recessions. a very large fraction of the working population was simply not working in April 2020.”
Can recessions be avoided?
Not really. Despite their best efforts, politicians and government officials can do little to stave off recessions completely.
Even if policymakers were able to create a perfectly oiled economy, they should also influence how Americans think about the economy. This is one of the reasons they try to put their best face on metrics like jobs reports, stock indexes, and holiday retail sales.
There are things officials can do to lessen the severity of a recession through the use of Fed monetary policy, for example, and fiscal policy, which is set by lawmakers.
With fiscal policy, legislators can try to mitigate the effects of recessions. A response could include targeted tax cuts or spending increases on safety net programs like unemployment insurance that kick in automatically to stabilize the economy when it is underperforming.
A more active approach could involve Congress approving new spending for, say, infrastructure projects to stimulate the economy by creating jobs, increasing economic output and boosting productivity – although this may be a tough proposition right now because that kind of spending could make the inflation problem worse.
Written by Isabella Simonetti and Niraj Chokshi. This article originally appeared in The New York Times.