What Is a Recession and Is the U.S. in One in 2022?
CAfter official statistics released on July 28, showing that the U.S. economic declined for its second consecutive quarter, fears that it could fall into recession grew.,Just days after the International Monetary Fund predicted a global recession, Pierre-Olivier Gourinchas, the Economic Counsellor and the Director of Research of the IMF, cites the pandemic and ongoing war in Ukraine as the main reasons for the “increasingly gloomy and uncertain outlook,” of the global economy.
Although a recession can traditionally be defined as two quarters of decline in gross domestic product (GDP) over consecutive years, there is some debate about how the current economy might fit that definition due to some unusual factors such as an active labor market.
Treasury Secretary Janet Yellen indicated that the economy was only “in a period of transition” during a White House press briefing on July 24. “I would be amazed if they would declare this period to be a recession, even if it happens to have two quarters of negative growth.” Yellen said, adding that the economy had rapidly grown 5.5% last year. “We have a very strong labor market. When you are creating almost 400,000 jobs a month, that is not a recession.”
Conversations about what causes a recession have also been started controversyOn Twitter
Here’s what you need to know about the state of the economy.
What exactly is a recession?
Many experts—including former Federal Reserve economist Claudia Sahm, who spoke to TIME—agree that, although the technical definition of a recession is two consecutive quarters of declining GDP, a measure of economic growth, that is not enough to make the call. The United States’ National Bureau of Economic Research (NBER), a nonprofit organization whose business cycle committee tracks peak and trough months of economic growth, instead defines a recession as a widespread contraction in the economy that lasts more than a few months, with each of the three criteria—depth, diffusion, and duration—being met to some degree.
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“It’s a national event,” Sahm said. “Consumers spend less, people lose their jobs, businesses cut back on investment, industrial production slows down. There are many different signs but there’s no one indicator.” During the second quarter of 2022, growth slowed at a 0.9% annualized rate, which some economists would consider to be the start of the recession. But the NBER’s Business Cycle Dating Committee, “has never accepted the two-quarters idea” as the official definition, Charles Radin, the NBER Director of Public Information, wrote in an email to TIME.
It can be difficult to compare like-for-like the U.S. with other countries because it tracks its economy differently. “There are a lot of countries that don’t have a dating committee so that’s a definition and rule of thumb used in a lot of the world,” Sahm noted. The Reuters report states that the U.S. was last in recession from March 2019 to April 2020. Though this recession only officially lasted two months, the NBER found that most recessions after World War II averaged “just over 10 months.”
NBER stated that while the nation had not returned back to normal by May 2020 but noted the quick growth following a short period of notable decline. The committee decided to label this brief time in recession. The nation still experienced hardships. The last brief recession saw 22 million job losses, while 16.9million people were unemployed in July 2020 according to US Department of Labor. According to Sahm, these high rates of unemployment are precisely what we need to avoid. “What makes a recession bad is people lose jobs, they suffer and there are long-term consequences. We’re not there right now but there is no guarantee we won’t get there,” Sahm said.
How can you cause a recession?
Market-related shocks have caused recessions in the past. This includes the 2008 financial crisis that was brought on by poor lending standards, a housing crisis and the 2008 dotcom bust, both of which were caused in part by excessive investment in tech stocks. The Federal Reserve, the central bank that oversees America’s monetary policy, works to prevent recessions through its policy decisions. It has raised interest rates in recent months to fight inflation.
The balance between monetary and economic policymaking is crucial. According to NPR, more than two thirds of all the American recessions since World War II have been caused by an inflation that was too rapid for the economy. NPR reports that the Federal Reserve increased interest rates three quarters of an inch in June and another on July 27. However, it may take many months for these effects to be seen. COVID-19’s impact has been enormous on the economy. “It was one of the engines of inflation,” James W. Hughes, Dean Emeritus at the School of Planning and Public Policy at Rutgers, told TIME. “The pandemic caused the economy to be shut down. Livelihoods were sacrificed in order to save lives and so that took away a lot of production in the United States, China, and around the world.” Inflation is currently at a 40-year high, reaching 9.1% in June, according to the U.S. Bureau of Labor Statistics. Consumers are particularly affected as gas prices have risen to $5 per gallon over the last month, although they have dropped to $4.30 since June according to AAA.
Inflation is harmful because it “reduces your salary or income, because your income isn’t increasing as much as inflation” according to Hughes. “It erodes your purchasing power, your savings, and the value of your house.” And though the pandemic is nowhere near its end, consumers’ increased spending in the months following the brunt of COVID-19 meant that suppliers initially struggled to catch up to buyers.
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Retailers like Target and Walmart have since struggled to predict the right amount and type of goods consumers need, creating a surplus of inventory people don’t want to buy. The decline in U.S. growth could be due to these large-scale errors.
Do we find ourselves in recession right now?
Economists believe that the world isn’t currently experiencing a recession. However, their outlook for the future remains dim. Survey of US macroeconomists by Financial Times/Initiative on Global Markets revealed that nearly two thirds think there will be a recession in the year 2023. Because of the many variables at work in the economy, it can be difficult to predict whether, when, or how long a recessive situation will occur. Experts agree.
Sahm believes that there’s even a possibility we could avoid a recession because of the strong labor market. The unemployment rate in June was 3.6%. It is still the lowest it has been for the past three months. Bloomberg reported that U.S. job opportunities are still high with nearly 1.9 open jobs in May for every person without a job. Facebook’s owner Meta—one of the largest publicly traded companies in the U.S.—and Twitter, are among companies that have announced hiring freezes that may seem concerning, but Sahm said that this is not entirely bad news. Removing job postings aren’t ideal, but “that means instead of someone losing their job there’s a job posting that goes away. And that is so much better than someone losing their job.” And though companies like Netflix have announced layoffs, this could generally be attributed to large sectoral hits post-pandemic. “There were industries and parts of the economy that even though the rest of everything was contracting, they were growing,” Sahm said. “We are largely coming out of [COVID-19] and so that means companies that banked on this being a permanent change, are finding out, well, not so much.”
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What should we do to prepare?
Although many Americans are concerned about the possibility of a recession coming, they still have time to adapt. “It’s extremely unusual and frankly bizarre that we have forecast this recession,” Sahm said, “but it could also be for families to prepare like they never had.” Economic experts suggest people set some money aside if possible. They can save money to provide a buffer and decrease their expenditures could help reduce inflation.
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Hughes and Sahm both predict that workers with low wages, especially those of color, will be adversely affected by a recession. But neither Sahm or Hughes expect an economic slump to happen before at least next year. “People shouldn’t panic,” said Sahm. “This is not a done deal and recessions are always bad, but this has all the makings, if it happens to be a mild recession.”
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