The chaotic atmosphere of the stock markets, staggeringly high interest rates and the weight of inflation have made the most pressing question for Americans whether we are in a recession.
This may not be the case yet, but signs of a certain economic weakness have begun to appear. For everyone, whether or not they work on Wall Street, it’s important to know when those signs will turn into a prolonged crash and how long that recession might last.
Major banks have updated their forecasts to reflect the growing possibility of an economic downturn. Analysts at Goldman Sachs put the probability of a recession in the next year at 30 percent, up from 15 percent earlier. Bank of America economists predicted there was a 40 percent chance of a recession emerging in 2023.
Here’s a short guide to everything you should know about recessions and why people are talking right now about the next one.
What is a recession?
Simply put, a recession occurs when the economy stops growing and starts shrinking.
Some experts say it occurs when the value of goods and services produced in a country, known as the gross domestic product, falls for two consecutive quarters, or one semester.
In the United States, however, the National Bureau of Economic Research (NBER), a century-old nonprofit organization widely considered the arbiter of recessions and booms, has a more espacious.
According to this office, a recession is “a significant drop in economic activity” that is widespread and lasts for several months. Usually, it implies not only a decrease in GDP but also in personal income, employment, industrial production and retail sales.
While that office’s business cycle dating committee declares when we’re in a recession, that formal declaration usually comes when we’re already well into the downturn. There are recessions of all kinds. Some are prolonged and others are short-lived. Some cause lasting damage, while others are soon forgotten.
The end of the recession is marked when growth in the economy is registered again.
Why do some people believe that a recession is coming?
The short answer is the Federal Reserve.
The US central bank is trying to slow down the economy to reduce inflation, which is now rising at the fastest pace since 1981. In the second week of June, the Federal Reserve announced the biggest increase in interest rates since 1994, and it is Further sizeable increases in the cost of borrowing are likely this year.
With rapid increases in interest rates, the Federal Reserve is trying to “tear the Band-Aid off the wound,” said Beth Ann Bovino, chief US economist at S&P Global.
“The message from the Federal Reserve is that we have to mobilize right now,” Bovino said. “We have to act decisively and implement many rate hikes now before the situation gets out of hand.”
Equity investors worry that the central bank will ultimately slow growth further and trigger a recession. As if this were not enough, the S&P 500 index is already in a bear market, or bear marketan expression that describes a situation in which stocks are down more than 20 percent from their recent high.
In the housing market, with mortgage rates at their highest since 2008, some real estate companies like Redfin and Compass have begun laying off employees in order to prepare for a recession they see coming.
“If people are depressed and worried about their finances or their purchasing power, they start putting away the checkbook,” Bovino explained. “The way households prepare for a recession is by saving. The downside is that if we all save, the economy doesn’t grow.”
None of these factors ensures that a recession will begin. It is important to keep in mind that the labor market is still strong, and it is a very important pillar for the economy. Some 390,000 new jobs were created in May, the latest in a series of consecutive gains spanning 17 months, and the jobless rate stands near 3.6 percent, nearly the lowest in half a century.
How often do recessions occur and how long do they last?
Although there is talk of “business cycles”, that is, of periods of growth followed by economic slowdowns, it is not possible to identify a precise regularity in the appearance of recessions.
Some may occur one after another, such as the recession that began and ended in 1980, and the one that followed, which started the following year, according to the NBER. Others have occurred a decade away, as in the case of the economic slowdown that ended in March 1991 and the next that began in March 2001, following the dotcom crash of 2000.
On average, post-World War II recessions have lasted just over 10 months, according to the bureau of investigationbut of course there are some that stand out.
The last two recessions highlight how different they can be from each other: The Great Recession lasted 18 months after starting in late 2007 with the bursting of the housing bubble and the subsequent financial crisis. The recession at the height of the coronavirus pandemic in 2020 lasted only two months, making it the shortest in history, although the economic slowdown was a devastating experience for many people.
“Just in terms of the contraction in actual activity and how fast it was, the Covid contraction was the most spectacular,” said Robert Hall, chairman of the business cycle dating committee at the National Bureau of Economic Research, which runs a recession record.
“A very significant fraction of the workforce was not working in April 2020.”
Is it possible to avoid recessions?
Not really. As hard as they try, politicians and government officials can do little to avoid recessions altogether.
Even if policymakers could create a perfectly functioning economy, they would also have to influence how Americans think about the economy. That’s one of the reasons they try to be positive on indicators like jobs reports, stock market indices and holiday sales.
The authorities can take some steps to lessen the severity of the recession, through monetary policies set by the Federal Reserve, for example, as well as budget policy set by legislators.
Through budget policy, policymakers can try to moderate the effects of recessions. One response could be targeted tax cuts or increased spending on supportive programs such as unemployment insurance, which are applied automatically in order to stabilize the economy when it performs poorly.
A more active strategy might be for Congress to authorize more spending, for example, in infrastructure projects that stimulate the economy thanks to the increase in jobs, greater economic production and the boost to productivity (although at this moment it would perhaps be a counterproductive option, since that type of spending could worsen the inflation problem).
Isabella Simonetti is the 2022 David Carr Fellow at The New York Times. @thesimonetti
Niraj Chokshi covers the transportation industry with a focus on autonomous cars, airlines, and logistics. @nirajc