Although inflation has slowed and GDP has recovered, most economists still predict a mild recession this year.
Consumer prices rose 6.5% year on year in December, but this was down from a 40-year high of 9.1% in June. According to the Labor Department’s consumer price index, core prices, which exclude volatile food and energy items, increased 5.7% year on year.
Meanwhile, GDP, or the value of all goods and services produced in the United States, increased by 2.6% in the third quarter that ended September 30, after falling at an annual rate of 1.6% in the first three months of the year and 0.6% in the previous three months.
So, how could a minor downturn occur? The previous two recessions were triggered by economic shocks, namely a housing crisis and a pandemic. A downturn this year would be precipitated by a Federal Reserve that has aggressively raised interest rates to cool an economy that has run too hot since the pandemic’s end.
What happens if a recession occurs, and what does it mean for everyday life?
Here’s what you should know.
What exactly is a recession?
A recession is defined as “a contraction in economic activity” or “when the economy shrinks,” according to Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
A recession is defined as “a significant decline in economic activity that spreads across the economy and lasts more than a few months,” according to Michael Pugliese, an economist with Wells Fargo.
The nonprofit National Bureau of Economic Research examines a variety of indicators, including employment, consumer spending, retail sales, and industrial production, to determine whether a recession has occurred.
According to Samana, there are two types of recessions: technical recessions and true recessions.
“The most significant difference is the severity,” he explained. “A technical recession is more of a logical shift. A true recession is characterised by a more significant contraction across a broader range of categories.”
Is a recession on the way?
According to a survey conducted this month by Wolters Kluwer Blue Chip Economic Indicators, economists expect a recession this year, but 97% believe it will be mild. That is, it will resemble recessions in the early 1990s and early 2000s rather than the two most recent episodes.
What exactly is a mild recession?
If the nation’s GDP, or economic output, falls 1.2% and the unemployment rate rises from a 50-year low of 3.5% to 5.4%, a mild recession could cost the economy 1.8 million jobs. Even though hiring remained strong amid recession fears, the national unemployment rate rose from 3.5% to 3.7% in October.
What exactly is a severe recession?
A severe recession could result in the loss of 3 to 4 million jobs, a 2% to 2.5% drop in GDP, and a 7% unemployment rate. According to the Federal Reserve, the “Great Recession” lasted from December 2007 to June 2009, making it the longest economic downturn since World War II.
When will a recession occur? Next year’s storm is becoming more likely, and it may be more severe.
What happens during a downturn?
According to Samana, the economy shrinks during a recession as a result of a decrease in individual spending.
“Consumption, consumer spending makes up about 70% of the U.S. economy,” he said, explaining that during a recession, the cutback in spending “then feeds into overall demand for services.
” As a result, businesses can reduce the number of people they employ, contributing to the economy’s contraction. During recessions, unemployment often rises, and total employment levels can flatten or fall, according to Pugliese.
Furthermore, during recessions, GDP growth tends to slow because there is less consumer demand and fewer employees, resulting in lower production of goods and services.
“If you have fewer employees, all else being equal, you may produce less in a recession,” Pugliese said. “All of these things are interconnected. Most of these indicators are either slowing or contracting in terms of growth.”
Recessions have an impact on wages as well, according to Samana.
“It’s more difficult to argue for wage increases,” he said. If unemployment is high, employers may deny the salary request, claiming that the worker could be replaced by someone else at a lower wage rather than a higher one.
Housing prices, like other goods and services, can fall during a recession, he says.
What about layoffs if there is a recession in 2023?
There will almost certainly be some pain as hundreds of thousands of workers lose their jobs. A wave of layoffs in the technology industry has already occurred.
As a result of the job losses, those who remain employed will be concerned about being laid off and will cut back on their spending. And the world’s hottest job market will cool, leaving workers with fewer options and putting a damper on job hopping.
But don’t expect the agony of the previous two recessions, which each displaced millions of people. Yes, the job market will almost certainly weaken in the coming months, but it is unlikely to come to a halt, according to economists.
Employers added 223,000 jobs in December, matching a 50-year low of 3.5%, though job growth has slowed from a monthly average of more than 400,000 earlier this year.
Is a richcession on the horizon?
We may experience a richcession, a term coined by Wall Street Journal reporter Justin Lahart in January to describe a recession that disproportionately affects the wealthy.
He claims that a richcession is on the way because household wealth for the wealthy did not grow as much as it did for the poor over the course of the pandemic.
Bottom-line wealth increased as a result of stimulus checks and other government stimulus money, as well as wage increases to try to keep up with inflation and attract workers in a historically tight labour market. Meanwhile, wealth at the top is stagnating because wages aren’t rising, and the stock market’s recent decline has hit the wealthy especially hard.
How long do recessions typically last?
According to Samana, an economy must experience two consecutive quarters of declining output to be classified as in a recession.
However, there is no set time limit for how long a recession must last, and the duration of a downturn can vary, according to Pugliese.
“You can have some that are extremely brief and quick. You could have others that are far more durable.”
What happens to inflation when there is a recession?
In the past, when the economy has slowed, inflation has remained high.
However, as a recession approaches, inflation will begin to fall. According to Samana, this can happen after a quarter or two of economic contraction.
What should you buy in advance of a recession?
If you’re worried about not having a regular paycheck in a couple of months, it’s not a bad idea to stock up on household goods and shelf-stable foods now while you still have one.
But don’t get too carried away.
You should also try to pay off as much debt as possible, especially any high-interest debt.
In a downturn, what should you avoid?
Spending should be monitored during a recession. Avoid unnecessary spending and going over budget.
Additionally, if at all possible, avoid incurring additional debt.
Should you buy a house during a downturn?
According to a study conducted by Cinch Home Services, a warranty company, Americans are split on whether they would buy a home during a recession.
A housing recession is defined by the National Association of Realtors as a six-month drop in home sales. Existing-home sales fell for the eighth consecutive month in September, and were down nearly 24% year on year.
The median existing-home sales price in September increased 8% year on year to $384,800, but it was also the third month in a row that prices fell after reaching a record high of $413,800 in June.
In the event of a recession, nearly half of those polled in the Cinch study said they would “likely” buy a home.
However, 42% of American homeowners polled in the Cinch survey said a recession would make them less likely to buy a home, while 14% said a recession would have no effect on their plans to buy a home. 72% of those polled in Cinch’s survey were homeowners, 24% were renters, and 4% were living somewhere without making a payment.
What exactly is a rolling recession?
While a recession is defined as a drop in overall economic activity, a rolling recession has a greater impact on certain regions or industries than others. According to the Federal Reserve Bank of San Francisco, while some sectors are experiencing downturns, the national economy may continue to grow.
According to economists at Charles Schwab, we are already in a rolling recession. Many economists believe that the housing market and manufacturing are both in a slump.