Chaotic stock markets, sky-high interest rates and the pain of inflation have left one question on the minds of Americans: are we in a recession?
Probably not yet, but signs of economic weakness are emerging. When it will turn into a protracted recession and how long that recession might last are major questions that concern people on and off Wall Street.
Major banks have upgraded their forecasts to reflect the growing possibility of an economic downturn. Analysts at Goldman Sachs estimate the probability of a recession over the next year to be 30 percent, up from 15 percent. Bank of America economists predicted a 40 percent chance of a recession in 2023.
Here’s a brief guide to what you should know about recessions and why some people are now talking about the next one.
Simply put, a recession is when the economy stops growing and starts to contract.
Some say that happens when the value of goods and services produced in a country, known as gross domestic product, declines for two consecutive quarters, or half a year.
In the United States, however, the National Bureau of Economic Research, a century-old nonprofit widely regarded 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. Usually that means not only a reduction in GDP, but also a decline in income, employment, industrial production, and retail sales.
While the office’s Business Cycle Dates Committee declares when we’re in a recession, that’s often long after the recession has already begun. Recessions come in all shapes and sizes. Some are long, some are 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 to curb inflation, which is now rising at its fastest pace since 1981. Last week, the Fed announced its biggest interest rate hike since 1994, with more big jumps expected. in loan costs. probably this year.
The Fed is trying to “tear off the Band-Aid,” said Beth Ann Bovino, chief US economist at S&P Global, raising interest rates rapidly.
“The Federal Reserve says we have to act now,” Bovino said. “We have to act strongly and we have to anticipate many rate hikes before the situation gets even more out of hand.”
Equity investors are worried that the central bank will end up slowing growth too much, triggering a recession. And the S&P 500 is already in a bear market, the term for when stocks are down 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 like Redfin and Compass are laying off employees in anticipation of a recession.
Consumers, the economic engine of the United States, are also increasingly worried about the economy, and that is a bad development. In May, consumer confidence hit its lowest point in nearly 11 years.
“If people are depressed, worried about their finances or their purchasing power, they start closing their pockets,” Ms. Bovino said. “The way households prepare for a recession is by saving. The downside is that if everyone saves, the economy doesn’t grow.”
None of this means that a recession will start for sure. It is important to note that the labor market is still strong and that is an important pillar of the economy. Some 390,000 new jobs were created in May, the 17th consecutive monthly increase, and the unemployment rate is near a half-century low at 3.6 percent.
How often do recessions happen and how long do they last?
While people talk about “business cycles” – periods of growth followed by recessions – there is little regularity in the way recessions occur.
Some may occur back-to-back, such as the recession that started and ended in 1980, and the next, which started the following year, according to the bureau. Others have happened a decade apart, as was the case with the recession that ended in March 1991, as well as the next, which began in March 2001, after 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 there are a few that stand out.
The Great Depression, seared into the memories of older Americans, began in 1929 and ended four years later, though many economists and historians define it more broadly, saying it didn’t end until 1941, when the economy mobilized. to enter the nation. In the Second World War.
The last two recessions highlight how different they can be: The Great Recession lasted 18 months after beginning in late 2007 with the bursting of the housing bubble and resulting financial crisis. The recession at the height of the coronavirus pandemic in 2020 lasted just two months, making it the shortest in history, even though the recession was a brutal experience for many people.
“In terms of the sheer amount of real activity contraction and how fast it was, the Covid contraction was the most spectacular,” said Robert Hall, chairman of the Business Cycle Citation Committee at the National Bureau of Economic Research, which conducts a tracking recessions.
“A very significant fraction of the workforce was simply not working in April 2020.”
Can recessions be prevented?
Not really. No matter how hard they try, politicians and government officials can do little to prevent recessions.
Even if policymakers could create a perfectly well-oiled economy, they would also have to influence how Americans think about the economy. That’s one of the reasons they try to put the best face on indicators like labor reports, stock market indices and retail sales during the holidays.
There are things officials can do to lessen the severity of a recession through the use of monetary policy by the Federal Reserve, for example, and fiscal policy, which is set by lawmakers.
With fiscal policy, policymakers can try to soften the effects of recessions. One response could include targeted tax cuts or increased spending on safety-net programs like unemployment insurance that kick in automatically to stabilize the economy when it underperforms.
A more active approach might involve Congress approving new spending on, say, infrastructure projects to stimulate the economy by creating jobs, increasing economic output, and increasing productivity, though that might be one Difficult proposition right now because that kind of spending could make the situation worse. inflation problem