Are We Headed for a Recession?
There’s a lot of talk about recessions, but what defines a recession and what causes it?
Typically, the macroeconomic term “recession” refers to a significant decline – usually two consecutive quarters – in a designated region’s general economic activity. It is reflected by gross domestic product (GDP) in conjunction with monthly indicators such as a rise in unemployment. However, the National Bureau of Economic Research (NBER), which officially declares recessions, says this definition is no longer accurate. The NBER now defines a recession as:
- Significant decline in economic activity spread across the economy that lasts more than a few months.
- Normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.1
Why are some economists predicting another recession?
Like the NBER, economists keep close watch on key indicators like employment, income, and interest rates. There are a few factors that, for economists, may indicate an impending recession.
- The inflation rate has been more than 5% for over a year. It is currently dropping, but the Fed still thinks it’s too high.
- The Fed raised the benchmark interest rate again in March 2023 and indicated they will continue to raise the rate throughout 2023. Theoretically, the interest rate needs to be as high as the inflation rate to curb inflation. Inflation was 6% in February 2023 while the interest rate range is now 4.75% to 5%.
- Housing, food, and energy prices are still rising. Wages are also rising but aren’t keeping pace with inflation, which reduces consumer buying power.
Financial institutions are also expecting a recession.
The economy, of course, 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 GDPNow tracker forecasted a negative revision in March 2023 and indicated the economy could be headed for another quarter of negative growth. This is a classic indicator for recession.
- In January 2023, the World Bank predicted a significant slowdown in growth (almost half the previous rate) that could continue for the next two years.
What role does the Federal Reserve play?
The Fed has a mandate to pursue maximum employment and price stability – dual economic goals. But they have limited tools to address inflation. Essentially, they can only raise or lower interest rates and treasuries’ asset purchases.
Ukraine’s ongoing war, an injection of almost $7 trillion into the U.S. economy since 2021 and attempting to eliminate fossil fuels without a viable alternative has increased inflation to 42-year high levels. The Fed will keep raising rates, which puts pressure on business hiring and triggers job losses.
What have past recessions looked like?
The most recent recession, during the COVID-19 outbreak, lasted only two months. But the GDP fell to -19.2 and unemployment rose to 14.7%. How have past recessions compared?
- The 2007 Great Recession lasted one year and six 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.
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