What is a recession and when will the next one start?

Chaotic stock markets, sky-high interest rates and the pain of inflation have left one question at the top of Americans’ minds: Are we in a recession?

Probably not yet, but there are signs of economic weakness emerging. When this will turn into a protracted slump, and how long this recession might last, are important questions that concern people both inside and outside of Wall Street.

Major banks updated their forecasts to reflect the growing possibility of an economic slowdown. Analysts at Goldman Sachs estimate the probability of a recession next year at 30 percent, up from 15 percent. Bank of America economists predicted a 40% chance of a recession in 2023.

Here’s a brief guide to what you should know about recessions and why some people are talking about the next one right now.

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, drops for two consecutive quarters, or half a year.

In the United States, however, the National Bureau of Economic Research, a century-old nonprofit organization widely considered the arbiter of recessions and expansions, takes a broader view.

According to the agency, a recession is “a significant decline in economic activity” that is widespread and lasts for several months. Typically, this means not just a contraction in GDP, but also a drop in income, employment, industrial production and retail sales.

Although the agency’s Business Cycle Dating Committee declares when we’re in a recession, this usually happens well after the slump has already started. Recessions come in all shapes and sizes. Some are long, others are short. Some create lasting damage, while others are quickly forgotten.

A recession ends when economic growth returns.

The short answer: the Federal Reserve.

The central bank is trying to slow the economy in order to contain inflation, which is now rising at the fastest pace since 1981. Last week, the Fed announced its biggest interest rate hike since 1994, and further big jumps in costs. of loans are likely this year.

The Fed is trying to “pull off the band-aid,” said Beth Ann Bovino, chief US economist at S&P Global, by raising interest rates quickly.

“The Fed is saying we have to act now,” Bovino said. “We have to move hard and we have to anticipate a lot of rate hikes before the situation gets even more out of control.”

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 down — the term for when stocks are down more than 20% from recent highs.

In the housing market, where mortgage rates have jumped 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 of the United States, are also increasingly concerned about the economy, and that is a bad development. In May, consumer sentiment 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,” Bovino said. “The way families prepare for a recession is to save. The downside is that if everyone saves, the economy will not grow.”

None of this means that a recession is certain to begin. It is important to keep in mind that the job market is still strong, and this is an important pillar of the economy. About 390,000 new jobs were created in May, the 17th consecutive monthly gain, and the unemployment rate is near a half-century low at 3.6 percent.

While people talk about “business cycles”, periods of growth followed by downturns, there is little regularity in the way recessions occur.

Some can happen back-to-back, like the recession that started and ended in 1980, and the next one that started the following year, according to the agency. Others occurred a decade apart, as was the case with the recession that ended in March 1991, as well as the next one that 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 some that 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 did not end until 1941, when the economy mobilized for entry. country in World War II.

The last two recessions highlight how different they can be: The Great Recession lasted 18 months after it began 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 lasted just two months, making it the shortest ever, although the downturn was a brutal experience for many people.

“In terms of the contraction of real activity and that rapidity, the Covid contraction was the most spectacular,” said Robert Hall, chairman of the National Bureau of Economic Research’s Business Cycle Dating Committee, which tracks recessions.
“A very significant fraction of the workforce was simply not working in April 2020.”

Not really. Try as they might, politicians and government officials can do little to avoid recessions altogether.

Even if policymakers were able to create a perfectly oiled economy, they would also have to exert influence over the way Americans think about the economy. That’s one of the reasons they try to put the best face on indicators like employment reports, stock market indices and holiday retail sales.

Policymakers can do a few things to lessen the severity of a recession through the use of the Fed’s monetary policy, for example, and fiscal policy, which is set by lawmakers.

With fiscal policy, lawmakers can try to soften the effects of recessions. One response might include targeted tax cuts or increased spending on safety net programs like unemployment insurance, which automatically kick in to stabilize the economy when it’s underperforming.

A more active approach might involve congressional approval of new spending on, say, infrastructure projects to stimulate the economy by creating jobs, increasing economic output and increasing productivity – although that might be a difficult proposition right now because that kind of spending can make the situation worse. inflation problem.

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