Are We Headed for a Recession?
There’s been a lot of talk about recessions, but what are they and what are their causes? How likely is the U.S. to go into a recession? Answers to these questions require a closer look at economic data.
What is a recession?
The economy is cyclical and experiences periods of growth (expansion) and decline (contraction). Typically, the macroeconomic term “recession” refers to a significant decline — usually two consecutive quarters — in a designated region’s general economic activity.Economists historically considered gross domestic product (GDP) in conjunction with monthly indicators, such as a rise in unemployment, to determine cycles. The National Bureau of Economic Research (NBER) is the agency that makes an official recession declaration and it’s redefined the criteria. The NBER now defines a recession as:
- Substantial decline in financial activity that spans multiple economic areas and lasts more than a few months.
- Criteria that are visible in real GDP, real income, nonfarm payroll employment, industrial production and wholesale-retail sales.1
The NBER now emphasizes nonfarm payroll employment and real personal income less transfers as its primary indicators but takes a more holistic economic approach in declaring recessions.2
What causes a recession?
There are many factors that can cause a recession. These include changes in supply and demand, political unrest, fading consumer and business confidence in the economy, and inflation. Like the NBER, economists keep close watch on key indicators like employment, income and interest rates.- The inflation rate skyrocketed over the last three years, reaching a peak of 9.06% in June 2022.3 This number was well above the “normal” rate of 1% to 2% annually, which signaled the economy was overheating.
- High unemployment rates generally indicate a floundering economy. For example, during the pandemic the unemployment rate was 13%.4 Income levels also dipped significantly and both impacted consumer spending.
- When there is low economic growth, the Federal Reserve (Fed) lowers interest rates to encourage hiring and consumer borrowing.
These are just some of the factors that, for economists, pointed to a potential recession in recent years.
How does raising interest rates help inflation?
The Fed has a mandate to pursue maximum employment and price stability — dual economic goals. What is the relationship between the Fed and inflation? Employment and pricing are key contributors to inflation, which is why the agency’s goal is to strike the right balance between the two. However, the agency has limited tools to address inflation. Essentially, they can only restructure monetary policy, raising or lowering interest rates and making treasuries’ asset purchases.Theoretically, interest rates and inflation trend in the same direction. So, when interest rates are low, consumers and businesses spend and borrow more. Conversely, consumers and businesses are less likely to borrow when interest rates are high, which lowers demand for goods and services. This slows the economy.
The Israel-Hamas conflict, Ukraine’s ongoing war, an injection of almost $7 trillion into the U.S. economy since 2021, as well as attempting to eliminate fossil fuels without a viable alternative increased inflation to 42-year high levels.
To curb inflation, the Fed raised the benchmark interest rate 11 times since March 2022. Inflation was 3.09% at the end of 2024,5 while the interest rate range is now 5.25% to 5.50%.6 February’s inflation rate was slightly higher than in June 2023 (2.97%) when it took a precipitous dip.7 The lower inflation rate is favorable but is still above the targeted 2% the Fed would like to see. As they continue to carefully monitor the economy, the agency projected three rate cuts this year.8
Do leading financial institutions expect a recession?
The economy plays a key role in borrowing and lending, so financial institutions also carefully assess trends and indicators to understand how it will impact business. Recent reactions include:- The Atlanta Federal Reserve’s GDPNowTM tracker forecasts annualized 3.4% GDP growth for the first quarter of 2024.9 In comparison, the Blue Chip Economic Indicators survey predicts a more modest 1.3%10
- The World Bank expects global economic growth to slow for the third consecutive year – 2.4% in 2024.11
These figures indicate an economic slowdown but not necessarily an imminent recession.
What have past recessions looked like?
Studying past recessions can provide valuable insights into their makeup and causes. The most recent recession, during the COVID-19 outbreak, lasted only two months. But the GDP fell to -19.2%12 and unemployment rose to 14.7%.13 How have past recessions compared?- The 2007 Great Recession lasted 18 months, with peak unemployment at 10% and GDP -5.0%. The subprime real estate crisis was the primary contributor.
- The recessions most like the current economy — four of them during a 13-year period from 1969 to 1982 — lasted more than four years each. U.S. expenditures on Vietnam, shifting manufacturing abroad, high oil prices, and inflation drove the economic turmoil.
The unemployment rate is currently 3.7%.14 Prices are still high, but most consumers’ wages are keeping pace with the increases. Overall, the economy is growing. While the inflation rate isn’t what the Fed thinks it should be, a recession doesn’t appear likely.
Do you have a plan for managing through a fluctuating economy? We can help. Complete a short form and a Synovus Treasury & Payment Solutions Consultant will contact you with more details. You can also stop by one of our local branches.
Market and Industry Insights
Gifts and Deals are on the Holiday Shopping List
Market and Industry Insights
U.S. Crop Production Hungering for Growth
Market and Industry Insights
Economic Outlook: What is Happening with the U.S. Economy?
-
Business Problems CEOs Will Face in 2024
Will the 2024 business outlook be a repeat of last year’s? These are the seven problems that CEOs are tackling.
-
Maintaining Positive Cash Flow with Digital Payments
Automated accounts receivable and accounts payable simplifies processing, enhances reporting and helps maintain positive cash flow.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- National Bureau of Economic Research, “Business Cycle Dating,” 2024 Back
- Ibid Back
- YCharts, “US Inflation Rate,” 2024 Back
- U.S. Bureau of Labor Statistics, “Unemployment Rate Returned to Its Prepandemic Level in 2022,” June 2023 Back
- YCharts, “US Inflation Rate,” 2024 Back
- Trading Economics, “United States Fed Funds Interest Rate” 2024 Back
- YCharts, “US Inflation Rate,” 2024 Back
- U.S. News and World Report, “Fed Signals Three Rate Cuts in 2024, End of Higher Interest Rate Cycle,” December 13, 2023 Back
- Federal Reserve Bank of Atlanta, “GDPNow,” February 8, 2024 Back
- USA Today, “What’s Ahead for the US Economy and Job Growth? A Peek at Inflation, Interest Rates, More,” January 2, 2024 Back
- The World Bank, “Global Economy Set for Weakest Half-Decade Performance in 30 Years,” January 9, 2024 Back
- Reuters®, “U.S. Economy Contracted 19.2% During COVID-19 pandemic Recession,” July 29, 2021 Back
- Zippia, “40 Historic United States Unemployment Statistics (2023),” October 26, 2022 Back
- U.S. Bureau of Labor Statistics, “Employment Situation Summary,” February 2, 2024 Back