How to know if a recession is coming

The word “recession“, which is generally refers to the decline of an economic cycle, sounds bad. A down economy is obviously painful for many people to live with, even though it is a natural part of the business cycle.

But while the term “recession” is likely to be used often in the weeks and months to come, the exact definition is not so straightforward. It’s technically possible that despite extremely low unemployment and other strong economic indicators, the US is currently in a recession and no one has yet noticed.

It’s hard to predict if and when a recession will hit – even though the storm clouds always seem so obvious in hindsight.

What could cause a recession now?

Inflation, or rising costs, are at their highest level in 40 years, eating away at what people can buy.

What is likely to cause a recession is the Federal Reserve’s plan to fight inflation by raising interest rates.

Fed Chairman Jerome Powell has argued that with targeted interest rate hikes, policymakers can engineer a “soft landing” – controlling inflation without triggering a recession.

  • Interest rate — learn more about what Powell is trying to do with CNN’s Paul R. La Monica.
  • Inflation – learn more about the price hike from CNN’s Allison Morrow.

If there was a recession, who would be to blame?

If a recession hits, some people will blame the Fed for not having acted sooner to control it.

You could legitimately blame the pandemic for twisting supply chains and Russia’s war on Ukraine for affecting energy and food costs.

One person who will receive a lot of blame – rightly or not – is President Joe Biden, who is expected to champion the sour economy under his leadership.

What exactly is a recession?

I was taught in shorthand that a recession is simply a period marked by two consecutive quarters of negative gross domestic product growth. This turns out to be too simple and not entirely accurate.

By this definition, the Covid-19 pandemic, which shook up the global economy and marked a pause in everyone’s life at the start of 2020, barely caused a recession.

It turns out that two consecutive quarters of falling GDP is just one indicator pointed out by Julius Shiskin, who was head of the Bureau of Labor Statistics in the 1970s and tried to figure out how to identify a recession when it was happening. As reported in The New York Times in 1974, he highlighted these factors:
  • Duration: Is non-agricultural decline in employment for at least nine months?
  • Depth: gross national product decline of at least 1.5% for at least two quarters? And is there an increase in the unemployment rate of more than 2 points and at a level above 6%?
  • Diffusion: Will most of the economy – more than 75% of all industries – feel the pinch in employment for six months or more?

Who officially decides if there is a recession?

There will be a lot of people talking about a recession if the US economy turns.

But the undisputed arbiter is a private, nonprofit organization founded by industrialists in 1920 – the National Bureau of Economic Research – which has a committee of eminent economists.

They meet regularly to look at a bunch of economic data and they decide if the current economic cycle has reached an economic peak (high point) or trough (low point). Recessions are the periods between peaks and troughs.

When do they decide if there is a recession?

Although accurate and a good academic reference, the National Bureau of Economic Research is not forward-looking. The committee does not predict recessions; it only marks them.

For example, the office did not officially state that the recession induced by the Covid-19 pandemic had started in February 2020 until June 2020, two months after its technical end.
Read all of their determinations dating back to 1979.

What exactly are they looking at to decide if there is a recession?

NBER does not say exactly. This is from his website:

There is no set rule about which metrics inform the process or how they are weighted in our decisions.

The organization monitors a range of federal economic data – the same jobs surveys and consumer spending reports that everyone sees – and its general definition of a recession is as follows:

Significant drop in economic activity that extends to the entire economy and lasts more than a few months. The committee is of the opinion that while each of the three criteria – depth, spread and duration – must individually be satisfied to some extent, the extreme conditions revealed by one criterion may partially compensate for the weaker indications of another.

How long do recessions usually last?

Recessions are generally shorter than expansions. There had been more than 10 consecutive years of growth before the Covid-19 pandemic.

There had been six years of growth before the Great Recession hit in 2007. The Great Recession lasted 18 months, according to the NBER.
The average expansions between World War II and the Covid-19 pandemic lasted about 65 months, and the average recessions lasted about 11 months, according to the Congressional Research Service.

The Great Depression, meanwhile, began with a 43-month recession that lasted from August 1929 to March 1933.

What’s the worst case scenario right now?

Former Treasury Secretary Larry Summers, who accurately predicted rising inflation when the Fed was skeptical, now says “stagflation” is a real possibility.

What is stagflation? Imagine rising prices due to inflation combined with a stagnant economy. The worst of both worlds.
“The Fed’s current policy path is likely to lead to stagflation, with average unemployment and inflation averaging more than 5% over the next several years — and ultimately a major recession,” Summers wrote in the Washington Post in March.

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