Chaotic stock markets, sky-high interest rates and inflation have left Americans wondering one question: Are we in a recession?
Probably not yet, but there are already signs of economic weakness. When this will turn into a prolonged recession and how long this recession can last are important questions on the minds of people on Wall Street and beyond.
Major banks raised their forecasts to reflect the growing likelihood of an economic downturn. Analysts at Goldman Sachs put the chance of a recession next year at 30%, up from 15%. Economists at Bank of America have predicted a 40 percent chance of a recession in 2023.
Here’s a short guide on what you need to know about the recession and why some people are talking about the next one now.
In the United States, however, the National Bureau of Economic Research, a century-old nonprofit widely regarded as the arbiter of recessions and expansions, takes a broader view.
According to the bureau, recession a “significant downturn in economic activity” that is widespread and lasts for several months. As a rule, this means not only a reduction in GDP, but also a decrease in income, employment, industrial production and retail sales.
While the bureau’s business cycle dating committee says we’re in a recession, this often happens 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?
Short answer: The Federal Reserve.
The central bank is trying to slow down the economy to curb inflation, which is currently rising at its fastest pace since 1981. Last week, the Fed announced the biggest rate hike since 1994, and another significant jump in borrowing costs is expected. most likely this year.
The Fed is trying to “rip off the band-aid,” said Beth Ann Bovino, chief US economist at S&P Global, by quickly raising interest rates.
“The Fed is saying we have to move now,” Ms Bovino said. “We must act diligently and we must increase the stakes early before things get even more out of hand.”
Equity investors are worried that the central bank will slow growth too much, triggering a recession. And the S&P 500 is already in a bear market, a term when stocks are down more than 20 percent from recent peaks.
In a 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 an economic downturn.
Consumers, the economic engine in the United States, are also increasingly worried about the economy, and this is a bad development. In May, consumer sentiment hit its lowest level in almost 11 years.
“If people are depressed, worried about their finances or their purchasing power, they start closing their wallets,” Ms Bovino said. “The way households prepare for a recession is to save. The flip side is that if everyone saves, the economy won’t grow.”
All this does not mean that a recession is bound to begin. It is important to remember that the labor market is still strong and is an important pillar of the economy. O 390,000 new jobs were created in May, the 17th consecutive monthly increase, and the unemployment rate is close to a half-century low of 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 are few patterns in how recessions occur.
Some of them may occur one after the other, for example, a recession that began and ended in 1980, and the next one that began the following year. according to the bureau. Others occurred ten years apart, as in the case of the economic downturn that ended in March 1991, and the next one that began in March 2001 after the dot-com crash of 2000.
On average, post-World War II recessions lasted just over 10 months each. according to the NBER., but of course there are some that stand out.
The Great Depression, etched in the memory of older Americans, began in 1929 and ended four years later. many economists and historians define it more broadlysaying it didn’t end until 1941 when the economy mobilized for the country’s entry into World War II.
The last two recessions show just how different they can be: The Great Recession lasted 18 months after it began in late 2007, when the housing bubble burst and the financial crisis followed. The recession at the height of the coronavirus pandemic lasted only two months in 2020, making it the shortest on record, though the recession has been a brutal test for many people.
“In terms of just the amount of contraction in real activity and that speed, the Covid contraction has been the most impressive,” said Robert Hall, chairman of the National Bureau of Economic Research Business Cycle Dating Committee, which tracks recessions.
“A very significant portion of the workforce was simply not working in April 2020.”
Can recessions be prevented?
Not really. No matter how hard they try, there is little that politicians and government officials can do to completely prevent a recession.
Even if politicians could create a perfectly fine-tuned economy, they would also have to influence how Americans think about the economy. That’s one reason they try to show off indicators like employment reports, stock market indices, and holiday retail sales.
Officials can do some things to lessen the severity of a recession, using, for example, the Fed’s monetary policy and fiscal policy, which is set by legislators.
With fiscal policy, lawmakers can try to cushion the effects of a recession. One response might include targeted tax cuts or increased spending on social safety nets like unemployment insurance, which automatically work to stabilize the economy when it’s down.
A more proactive approach could include congressional approval of new spending on, say, infrastructure projects to stimulate the economy by adding jobs, increasing output, and boosting productivity—although this can be difficult now, because such spending can exacerbate the problem of inflation.