What is a recession? How bad might things get?
Recession 2022: Fed Chair Jerome Powell agreed that a slew of recent data has intensified the debate
PremiumUS inflation is at a four-decade high, borrowing costs are surging and stocks have taken a beating. With the Federal Reserve going full steam ahead on an aggressive campaign to temper demand and tame prices, concerns are growing that its moves will tip the US into recession. There’s no shortage of opinions about whether a downturn is inevitable, when it might start and how bad it might be.
1. What is a recession?
It’s often understood as a period when economic output contracts for two straight quarters. But 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 a recession differently: as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months." It looks at three criteria -- depth, diffusion and duration -- and considers factors such as employment, inflation-adjusted spending, industrial production and income. 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. Could the US already be in a recession?
For Americans facing decades-high inflation, near-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. Fed Chair Jerome Powell agreed when asked that same question on July 27. That said, a slew of recent data has intensified the debate.
3. What do the figures show?
The government’s hallmark measure of economic activity -- gross domestic product -- posted back-to-back quarterly declines in the first half of the year. The pullback in the first quarter largely reflected a surge in imports; GDP is meant to capture domestic production, so surging imports dragged down the headline figure. The second quarter, however, indicated a more concerning decline. The government’s initial assessment of the second quarter, released on July 28, showed a slowdown in consumer spending as well as declines in business investment, government outlays and housing. Inventories also weighed on GDP. While the numbers so far in 2022 fit the recession rule of thumb of two straight quarters of shrinking GDP, that doesn’t mean the US is officially in recession as determined by the NBER.
4. Are economists expecting a recession soon?
Bloomberg Economics’ model says there’s a 100% probability of a recession by the start of 2024. Economists at Deutsche Bank AG, one of the first major banks to forecast a recession, expect it to begin in mid-2023; Wells Fargo & Co. sees the US entering a recession in early 2023, and Nomura Holdings Inc. expects one even sooner—starting at the end of 2022.
5. Does that mean a recession is unavoidable?
President Joe Biden’s administration insists a recession is not a foregone conclusion. The Fed’s Powell has held out hope for a so-called soft landing -- a cooling in economic activity that doesn’t lead to a recession -- but he acknowledged on June 22 that achieving one will be “very challenging." So far, the labor market remains a bright spot in an otherwise darkening economic picture, with employers adding more jobs than expected in June.
6. How bad might things get?
For the most part, economists are generally describing any potential upcoming recession as mild or moderate. Even so, all recessions are painful and even a mild recession would likely still mean hundreds of thousands of Americans losing their jobs. Estimates vary, but the unemployment rate is expected to rise from a near five-decade low to somewhere around 4% to 6%, well below the 10% seen in the wake of the Great Recession and the nearly 15% seen at the start of the pandemic. In terms of duration, economists differ. One reason this recession could prove longer lasting is that high inflation may hold the Fed back from stepping in to support the economy. 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 would look like.
7. Is the global economy heading for a recession?
The global economy is facing a similar picture: high inflation and aggressive steps by central banks to curb it. “The outlook has darkened significantly since April," Pierre-Olivier Gourinchas, the International Monetary Fund’s chief economist, said in July. “The world may soon be teetering on the edge of a global recession, only two years after the last one." In a report released in early June, World Bank President David Malpass said that even if a global recession is averted, the combination of high inflation and slow growth -- something known as stagflation -- could persist for several years. In Europe, much of the fate of the economy hinges on access to Russian gas, though recession risks differ by country. European Central Bank President Christine Lagarde has emphasized that a recession is still not the central bank’s baseline scenario; some of her colleagues describe the risk as non-trivial but say any contraction would be temporary. 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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