What You Need to Know About Recessions — Including Whether We’re in One

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US inflation is at a four-decade high, borrowing costs are surging and stocks have taken a beating. With the Federal Reserve embarking on an aggressive campaign to temper demand and tame prices, concerns are growing that its moves will tip the US into recession. In recent weeks, there’s been a plethora of discussion on whether a downturn is inevitable, when it might start and how bad it might be.

It’s often defined as a period when economic output contracts for two straight quarters. The National Bureau of Economic Research’s Business Cycle Dating Committee, a group of academics whose determination is regarded as official in the US, defines it as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months” and looks at three criteria: depth, diffusion and duration. To assess these criteria, they consider factors such as employment, inflation-adjusted spending, industrial production and income. And while each of the criteria need to be met to some degree, NBER says extreme conditions revealed by one criterion may offset weaker signals from another. For instance, the pandemic-driven recession of 2020 was broad-based and characterized by a sharp drop in economic activity, but it was extremely short, lasting just two months.

2. Are economists expecting a recession soon?

Bloomberg Economics says there’s close to a three-in-four probability there will be a recession by the start of 2024. Economists at Deutsche Bank AG, one of the first major banks to forecast a recession, now expect one to begin in mid-2023; Wells Fargo & Co. predicts the same. Nomura Holdings Inc. expects one even sooner, starting at the end of 2022. The likelihood of a recession could climb even higher if gasoline prices continue to rise and the Fed opts for another 75-basis-point rate hike in July. (When the central bank raised interest rates by that much in June, it was the biggest such move since 1994.)

3. Could the US already be in a recession? 

For Americans facing decades-high inflation, record gas prices and ballooning grocery bills, it certainly may feel like it, but most economists say the US economy is not currently in a recession. The government’s hallmark measure of economic activity — gross domestic product, or GDP — did contract in the first three months of this year, the first time it has done so since 2020. But the pullback largely reflected a surge in imports rather than a sharp slowdown in consumer spending. In fact, consumer spending rose at the fastest pace in nearly a year in the first quarter. Because GDP is meant to only capture domestic production, surging imports — a reflection of strong consumer demand — dragged down the headline figure. It’s possible the US economy will technically shrink in the second quarter as well — this time likely a reflection of a slower accumulation of inventories — while consumer spending is expected to remain solid. That wouldn’t mean the US is officially in recession, though some politicians and commentators would surely claim that it is.

4. Can the US avoid a recession?

A recession is not a foregone conclusion, as President Joe Biden’s administration has emphasized in recent weeks. Fed Chair Jerome Powell has held out hope for a so-called soft landing — a cooling in economic activity that doesn’t lead to a recession — but acknowledged on June 22 that achieving one will be “very challenging.”

5. Will it be a bad recession? 

For the most part, economists are generally describing the potential upcoming recession as mild and short. Estimates vary, but the unemployment rate is expected to rise from a near-five-decade low to somewhere around 4% to 6%. That’s well below the 10% seen in the wake of the Great Recession and the nearly 15% seen at the start of the pandemic, though it would still mean hundreds of thousands — if not millions — of Americans losing their jobs. It’s worth noting that as hard as it is to forecast when a recession will occur, it’s harder still to envision what one will look like. 

6. Is the global economy heading for a recession?

The global economy is facing a similar picture of high inflation and increasingly aggressive steps by central banks to curb it. “The world economy is again in danger,” World Bank President David Malpass declared in a report released in early June. He noted that even if a global recession is averted, the combination of high inflation and slow growth could persist for several years. Economists at Citigroup Inc. pin the probability of the world economy falling into recession at nearly 50%. In Europe, European Central Bank President Christine Lagarde has emphasized a recession is not the central bank’s baseline scenario for the eurozone, but risks differ by country. Meantime, in China — the world’s second-largest economy — the outlook remains uncertain. The economy is showing mixed signs of recovery, strained by stringent Covid-19 measures and associated lockdowns, but the government is seeking ways to step in. 

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